In today's Finshots we see why cotton prices have been rising of late and the impact it has on the wider ecosystem

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The Story

In October 2021, cotton prices in India reached a record high. It was trading at ₹63,000 per candy. For the uninitiated, candy is a unit of measurement, used to denote mass. 1 candy of cotton equals 356 kgs. So technically, it would have cost you ₹63,000 to buy 356 kg of cotton.

At the time the consensus was that “this too would pass” and prices would trend downwards. But against all odds, they have been rising. And today, they’re flirting with the ₹1,00,000 mark. Also, if you’re wondering, this isn’t just unique to India. Global prices are also at an 11-year high and there are many furrowed eyebrows wondering what’s happening here.

As is customary, most people will blame the war in Ukraine or oil prices for this catastrophe. After all, it seems to be a recurring theme everywhere. However, Russia and Ukraine aren’t big exporters of the commodity and rising oil prices can’t alone account for this anomaly. In fact, even the experts are a bit flummoxed.

The International Cotton Advisory Committee (ICAC) recently stated that it was “difficult to identify a concrete reason for this price increase as fundamental supply and demand principles seem to be well balanced”.

But despite this honest admission of bewilderment, we can still speculate on the matter, and we will do this using the Indian example.

For starters, India has been dealing with bad weather. When unseasonal rains lashed cotton-producing states in November and December, it affected the colour of cotton. And “colour” is very important in this business. There’s high demand for white cotton. But spotted, tinged & yellow-stained cotton may not command the same premium.

Also, despite being one of the largest producers of cotton in the world, the crop yield here isn’t amazing. It now ranks 34th in terms of yield, below Vietnam, Pakistan, Ivory Coast, Ethiopia and Myanmar. Or put another way, while India accounts for nearly 39% of the world’s area under cotton cultivation, it contributes only 23% to the total yield.

Why is that happening you ask?

Well, we need to take a slight detour. Back in the early 2000s, India was barely producing enough cotton to meet its own demand. We had to import it by truckloads. But then, genetically modified cotton seeds made their way into cultivation and changed the whole ecosystem. These seeds offered higher yields. They were more resistant to pests and were generally suited for Indian conditions. It’s no wonder then that production figures tripled over the last decade.

But now, their efficacy is on the decline. With the evolutionary arms race in full swing, pests have also adapted to these new varieties. Pink bollworms and white-fly insects are on a rampage and they have been gravely affecting cotton yields.

Also, there’s the demand factor. During the pandemic, cotton mills were forced to shut shop. But now, demand for cotton is slowly picking up and mills that operated only at 40% capacity have begun to crank up production.

And finally, there’s the alleged matter of hoarding. Some suggest that farmers are now hoarding cotton in the hope that prices keep rallying. They’re trying to profit off of this price rise and it seems it’s driving prices higher. And while you could see how that improves outcomes for cultivators, it is, however, hurting another part of India — the micro, small, and medium enterprises (MSMEs). You see, the apparel industry employs around 14.5 million people and 70% of the units are MSMEs. They’re the ones facing the brunt of higher prices. And complaints are pouring in:

“My cotton and readymade garment orders have shrunk 75% now.”

“We aren’t thinking of profit margin now but just about keeping the factories running somehow. The way we used to do business is history.”

“Many mills across the country have reduced their production to one-third. Several firms are operating only one shift daily, and are enforcing a minimum of three-day holiday per week. They are unable to run the mills because of the high cotton prices”

And you can see why they’re struggling.

Unlike large MNCs, these MSME mills don’t have easy access to financing. And since they have limited working capital on hand, they can’t hold more than 40 days' worth of cotton stock. Meaning — they can’t buy cotton in bulk when prices moderate and instead have to keep buying cotton every month even when prices go on a tear. And when it reaches such exorbitant levels, they run out of cash entirely, and they’re forced to shut shop,

Now the Indian government has tried to intervene and extend some support. They removed the import duty of 10% on cotton recently and promised to sustain the program until September 2022. Perhaps this will have an effect on prices.

But the manufacturers want something else too. They want a total ban on cotton exports. And if the ban were to come to fruition, you could bet that it would likely tame prices. But farmers and traders are having none of this. They want to sell their commodity anywhere they see fit and they want to pounce on this opportunity.

Meanwhile, readymade garment manufacturers have their own demands. They’re seeking a ban on export of yarn. Yarn spun from raw cotton. And the mills don’t want this happening since that would affect their livelihood. They want to have the flexibility to export anywhere they see fit (Just like the farmers) and they’re fighting back.

So yeah, rising cotton prices are having an impact across the ecosystem and everybody’s trying to protect their own interests.

Who will the government listen to, ultimately?

We don’t know.

Until then…

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PS: Oh, and one more thing —  “pure cotton” tags could disappear from your clothes for a while. And you could be staring at the comeback of the cotton and polyester blend.