The New Cotton King: India Struggles to Fulfil Demand of Global Cotton due to Trade and Politics
[Mumbai, 23.11.2023] The cotton industry in India continues to be in crisis due to significantly higher prices of cotton fibre compared to international competitors, concerns about weak prospects for the new cotton crop, and reduced demand for yarn in local and global export markets.
The current market challenges are complex and have little economic precedent. Several factors contribute to this, including reduced consumer spending in Europe and the US, which has led to decreased demand for textiles and yarn. Additionally, local politics in India have utilised the price of cotton as a lever to appeal to a large block of voters, primarily cotton growers in rural agricultural communities. Furthermore, low-priced imported yarn is being offered below prices than what many spinning mills in India and Bangladesh, which rely primarily on Indian cotton, can compete on price given the price of cotton today. Due to these factors, there is growing pressure on the government to intervene and support India's fibre and textile industry through various trade and subsidy programs, which would help improve the situation.
Many spinning mills have reported to run at 50% capacity and have shut down in some regions of India during November. This is due to the reduced demand as well as cost of fibre, which remains high due to the Minimum Support Price (MSP), a price-support mechanism governed by the Ministry of Agriculture and Farmer Welfare that is not consistent with international prices in the market. The MSP for medium-staple cotton is currently issued at 6620 INR (79,44 USD) per quintal or one-hundred kilograms (220 pounds) of raw cotton. Yet on the ground, the price of raw cotton purchased by ginners can far exceed this figure, depending on the region. Due to the higher cost of raw material, this makes Indian cotton lint more expensive and less competitive than international cotton prices. For example, today the average price for cotton is about 0.77 USD per US pound, while Indian cotton is about 0.88 USD per US pound.
Higher cotton lint prices in normal markets often lead to higher yarn prices over time. Yet, Indian spinners, primarily on domestic fibre sources, struggle to maintain profitability as the current rates for yarn are not viable for spinning basic yarn qualities used in the fabric found in a typical T-shirt. For example, a 30s Ring-Spun Yarn competitively priced at 228 INR/KG (2.74 USD) is below the cost of production if spinners have to purchase Indian yarn at current rates of 0.88 USD.
"Chinese spinning mills have been flooding their domestic market with low-cost yarn.", said one of Sourcery's Spinner Partners, who chooses to remain anonymous. "This makes it more difficult for yarn from India, Pakistan and Bangladesh to enter the market competitively."
India currently has the second-largest spinning capacity in the world, behind China. For this reason, many international brands, retailers, and their direct vendors are looking to India to fill a substantial supply gap of cotton and yarn, given their concerns with the origin of fabric and yarn that may be made with cotton fibre originating from China's Xinjiang region, whose use and import is currently banned by the United States and is under continued scrutiny in the UK and EU. Therefore, there may be a heightened risk for Indian, Pakistani, Bangladeshi, and Vietnamese manufacturers of fabric and apparel who have to depend on low-cost imports of yarn and fabric, potentially of Chinese origin, to meet international brands' demand and price requirements. With the ban on Xinjiang cotton, India is now the single-largest producer of cotton and yarn for exports–yet given the market challenges, it cannot compete on price.
The Cotton Association of India (CAI) has released its final estimate of crop production for the 2023-24 season (October-September), indicating a slight increase in production to 31.8 million bales. As this cotton is delivered, it will add to the existing inventories that may continue to put pricing pressures on the price of cotton to make it more competitive. However, due to the politicising of the MSP, low cost yarn from non-Indian origins, the mismatch between the market and the MSP will continue to exacerbate the challenges faced by the market, and by ginners and spinners and the rest of the textile industry.
Ultimately, the market will begin to move and correct itself, but the farmers themselves will be the most negatively affected. The reason is that we are likely seeing a repeat of last season (MY 2022/23) with farmers holding onto their cotton with hopes of a higher price based on the MSP rather than market realities. At the current prices for raw cotton, cotton ginners cannot purchase at the prices demanded by the farmers and spinners are unwilling to purchase cotton at the prices offered by the ginners on lint cotton. Therefore, many growers will hold and store their cotton and much of it will begin to lose quality in terms of moisture and colour due to informal storage conditions further reducing its value.
The overall Indian textile industry is currently struggling with low demand in both domestic and export markets. Given the current challenges, the prospect of India meeting the objective of $100 billion in textile and apparel exports by 2030 will depend largely on the interventions that the government of India will take to rectify to ensure better crop performance, sustainable prices that are competitive in international markets and continuing to position India a viable sourcing alternative to China where visibility and traceability and assurance down to the farm level provides the assurance that is necessary to fill the demand in the market once it returns to health.
Sourcery acutely understands the challenges faced by the sector from growers to retailers and is demonstrating that through deep and sustained trade intervention, Partners can solve challenges that a market on its own cannot do. These interventions amount to facilitating more transparency, fairness, efficiency in cotton trade by mitigating seller and buyer counterparty risks by ensuring contract and trade terms are fair, the quality of the fibre and yarn meets the requirements and that all the products are fully traceable down to the farm level. This is why more and more manufacturers and farming organisations are committing to the Direct-to-Grower Programme, which aims to transform trade for good.
Staying alert and up-to-date on the current price projections is crucial. As a commercially neutral global sourcing solution, Sourcery has visibility into thousands of trades across hundreds of manufacturers from India, Bangladesh, Vietnam, China, the US, Australia and Brazil through our Direct-to-Grower™ Partners.
Sourcery's Intelligencer Market Report is built on real-market data that provides more insight to buyers and sellers on the market dynamics related to the actual trade of fibre, yarn and fabric, not the speculative pricing upon which the industry currently relies. Sourcery's Intelligencer Market Report provides a 360-degree view of the global cotton industry – every Monday by 10 am IST.
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About Sourcery: Sourcery is a member-driven global sourcing solution that connects brands, manufacturers and growers to secure and transact fibre, yarn and fabric with full transparency, traceability and verified impact. Through its Direct-to-Grower Programme, Sourcery aims to transform trade for good and empower its Partners to drive meaningful and measurable commercial and environmental value that has a profound and positive impact, from growers to consumers.
Contact: Eva Sirch, Global Marketing and Communications Director, eva@thesourcery.io
