Banning cotton export is no solution: Financial express: 12th May 2010

The decision to ban the export of cotton is significant as it has implications, not just for the industry, but also for the ideology that guides policy. In the past, too, the policy response to higher prices has been to restrict the export of the product. This was witnessed in the case of pulses and wheat in 2007, maize in 2008 and sugar in 2009—and now in cotton. The dynamics of such price movements and policy reaction needs to be put in perspective.

Cotton is a unique crop that was influenced by the introduction of the Bt variety, which has had an impact on its cultivation. Prices are sensitive to supply conditions. While there is a minimum support price that is offered to farmers, it is under discussion as the subsidy bill has been increasing. Production has tended to be cyclical and output that had started accelerating from 2003-04 to peak at around 26 million bales in 2007-08, slipped in 2008-09 to 22 million bales and remained stagnant in 2009-10. Demand, on the other hand, has been increasing from both domestic and global segments. This has been the primary reason for the increase in prices.

India is the second largest exporter of cotton in the world and a ban on these transactions means that some of the purchasers like Bangladesh, Pakistan, China, etc, will be affected and will have to look out for other avenues to sustain their textile industries. Quantitatively speaking, around 2.5 million bales of cotton will be required from other countries to fill in this gap.

The immediate impact is that the 25% increase witnessed in prices has been arrested, affecting the incomes of the farmers. From a price of around Rs 2,900-3,000 per quintal that had been fixed, they are now getting a lower return of around Rs 2,500 on account of this move, as the shortage has translated into excess supply. This fall in income has affected the incomes of farmers, especially those who cultivate a single crop in a year. Farmers had earlier tended to bring in more area under cotton cultivation by using Bt seeds. However, with lower prices this season, there could be a tendency for them to move to other crops such as soybean, which

is the closest substitute, in terms of soil conditions. This could affect the future area under cultivation, which will re-create the problem of supply in the next season.

The ban has already seen the global prices rising as major importers have started looking at sourcing cotton from other countries, particularly the US, which is the largest exporter of cotton. This has put pressure on the prices, which was reflected in the ICE cotton futures that have shown an upward movement. Higher international prices do tend to get buffered into domestic prices with price correlation being around 60-80% for most products. So, in the medium run, prices may remain at a higher level.

The broader issue to be debated is whether or not an export ban is a solution to the problem of higher prices. The argument here is that as long as prices are being guided by fundamentals, enhancing supplies is the only way to reduce prices. There are some issues regarding when a ban should be imposed. The first is that farmers would tend to substitute cotton with other crops, which will tilt the crop-balance in favour of others. Second, while prices will come down in the immediate run, the change in cropping pattern will affect prices in the following season. Third, export bans in particular will turn the competitive advantage in the product to other suppliers, which can make it difficult to recoup the loss in market share. Fourth, the very industry that the government is trying to protect through such a ban will find it more difficult to plan in the future with both the supply and demand sides being potentially affected. Last, such bans would affect the external credibility of the industry as legal disputes arise from reneging on contracts. This will impact the country’s ability to export in the future.

Interventions are hence not normally advisable, either in the form of bans (in terms of exports or futures trading) or price intervention through diktat. The issue is not just one of supporting the farmers or the user industry. With growing integration of commodity markets and prices, it will be difficult to control these linkages. An export ban will only push the country out of the market, which will be leveraged by competitors. And as we have seen in the case of sugar, bans did not help with the global price linkage returning to push up the prices further. There is need for more extensive debate on the issue of export ban, which goes beyond the current issue of cotton.