Earlier this week, India decided to impose an immediate ban on all of its cotton exports.
The announcement came from India’s Directorate General of Foreign Trade, a division of the Ministry of Commerce and Industry. It cited declining cotton yields, due to diseased crops, and wants to set aside its existing production for domestic usage, as India’s cotton buyers fret about lower supplies and higher prices.
In January, India’s Cotton Advisory Board said this year’s cotton harvest will total 34.5 million bales of cotton, down from an earlier estimate of 35.6 million bales. If cotton shortages hit India, the Nasdaq says many Indian companies can’t supplement their supply by buying cotton on the global market because it’s too expensive. Fair enough.
But the ban is significant news for the rest of the world, as India is the globe’s second-largest cotton producer and exporter.
Speaking to the Financial Times, Dhiren Sheth, President of the Cotton Association of India, stated:
“It’s an extremely bad decision. It will harm India’s reputation and we will suffer long term.”
And it’s not just India that will suffer. Depending on the length of the ban, it could squeeze global cotton supplies and push up prices.
India to China: “Stop Hoarding Our Cotton!”
This isn’t the first time that India has banned cotton exports. It did so two years ago – and ominously, the decision triggered a major price spike to an all-time high of $2.27 per pound.
But there’s another reason behind the ban, aside from just lower crop yields and potential low supplies for India’s cotton merchants.
So far this financial year (which ends on March 31), India has exported 8.5 million bales of cotton, each weighing 375 pounds. But that’s far above Bloomberg’s projected estimate of 6.25 million bales – and also higher than the government’s January forecast of 8.4 million bales.
Here’s the rub: Around 80% of Indian cotton exports are going to China. Ordinarily, this wouldn’t be a problem for India if China were actually using the cotton. But according to the Financial Times, India says China is stockpiling the cotton as a “buffer against price volatility.”
Seems like a reasonable and strategic move. But according to the U.S. Department of Agriculture (USDA), as of the end of January, China has stuffed five million bales of cotton into its stockpile during the current crop year. This, coupled with the fact that it’s already the world’s biggest cotton producer, means it accounted for 15% of global cotton usage this year.
Last month in the Financial Times, the USDA was quoted as saying:
“Competition from China’s reserve purchases is raising world prices and hindering the capacity of the global textile industry to acquire cotton.”
But is it?
China Fights Back
After the news was announced, the May cotton futures price initially bounced by 4.5% to $0.92 per pound on the Intercontinental Exchange. However, it’s since retreated to its original level of $0.88 – most likely on profit taking.
That’s a far cry from the $2.27 set a year ago. The USDA itself says that global cotton supplies are set to grow for a third straight year. In fact, the United States is the only cotton producer that hasn’t increased its supply. Coupled with that, global cotton demand is down 4% this year.
Besides, if India is so offended by China’s cotton hoarding, why not just reduce its exports to China alone, rather than implementing a worldwide ban?
For its part, China lodged an official complaint today against India’s ban. And it was enough to get Indian Prime Minister Manmohan Singh and his cabinet around the table to discuss lifting the ban.
As it is, the longer India’s global cotton export ban continues, the more the world will be on edge about the potential for shrinking supplies and higher prices.
I’ll keep my eye on developments here. But in the meantime, err on the side of caution and go buy those new underpants while prices are still favorable!
Have a good weekend,