India's 2015 cotton production is forecast at 29.3 million 480 lb. bales on 12 million acres; more than a million bales lower than USDA's official 2014 estimate and a 5 percent acreage reduction. Cotton consumption is forecast higher over the current year as export demand for cotton yarn and cotton lint recovers and markets diversify. Exports are forecast at 5.5 million 480 lb. bales. Government procurement has reached 7 million 480 lb. bales and disposal of these stocks remains a concern.

Cotton

2013/2014

2014/2015

2015/2016

Market Begin Year

Aug 2013

Aug 2014

Aug 2015

India

USDA Official

New post

USDA Official

New post

USDA Official

New post

Area Harvested

11,700

11,700

12,700

12,700

0

12,000

Beginning Stocks

11,945

11,945

11,515

11,022

0

13,222

Production

31,000

31,000

30,500

30,000

0

29,300

Imports

675

675

1,100

1,000

0

800

MY Imports from U.S.

0

0

0

0

0

0

Total Supply

43,620

43,620

43,115

42,022

0

43,322

Exports

9,255

9,261

4,200

4,800

0

5,500

Use

23,350

23,339

24,000

24,000

0

24,500

Loss

0

0

0

0

0

0

Total Dom. Cons.

22,850

23,339

24,000

24,000

0

24,500

Ending Stocks

11,515

11,022

14,915

13,222

0

13,322

Total Distribution

43,620

43,622

43,115

42,022

0

43,322

1000 HA, 1000 480 lb. Bales, PERCENT, KG/HA

Production

Acreage Reductions and Yield Gains as Farmers Mull Crop Choices

India's 2015/16 cotton production is forecast at 29.3 million 480 lb. bales (37.5 million 170 kg bales/6.3 MMT) on 12 million harvested hectares. Planting decisions are largely driven by price realization, but additional factors such as the relative cost of production of competing crops, water availability, central/state government support (including anticipated minimum support prices (MSP)) and a timely monsoon are crucial factors.

Farmers have shown a consistently strong preference for cotton relative to other crops in recent years. However, as the MY 2015/16 planting season approaches, farmer's planting decisions to expand/contract cotton acreage have become difficult as prices of competing crops in various states have dropped. Farm-gate prices of various competing crops such as paddy, cluster bean (guar), soybeans, maize, and sorghum have fallen on average by 30 percent since the start of the August 2014 marketing season.

Assuming a normal monsoon, overall yields for MY 2015/16 are forecast at 531 kg per hectare. This is higher than MY 2014/15 yields of 518 kg per hectare when crop planting was delayed by unseasonal rains. India's cotton yields continue to be significantly lower than the global average of 800 kg per hectare; a difference due largely to the relatively low plant populations that farmers seed in order to create rows that are wide enough for bullocks to traverse. Industry experts believe the advent of biotech cotton has improved the predictability and stability of cotton as a crop which has supported the expansion of cotton area in recent years.

Northern India Cotton: A Story of Irrigation and Stable Yields But Falling Acreage

Cotton planting in the northern states of Punjab, Haryana and Rajasthan is irrigated and area is generally stable from year to year. Punjab cotton acreage is expected to be lower compared to last year as farmers shift some of the cotton area towards paddy cultivation due to better price realization. Yields are anticipated to be around 574 kg per hectare which is similar to the three year average as most of the area is irrigated. The 2014/15 season was affected by late rains and pest pressure which led to lower yields. Similarly, in the states of Haryana and Rajasthan, cotton acreage is expected to be 5 percent lower, even though price realization from competing crops such as guar, paddy, and bajra (millet) has been low. Farmers are expected to shift to less labor intensive crops as rising labor costs for harvesting remains a concern.

Central India: Where Cotton Remains King

The area in the largest cotton growing state of Gujarat will be lower by 3 percent with forecast yields remaining the same. In Gujarat, cotton remains an important crop for the state as the area is a hub for exports of cotton and cotton products and has adequate ginning capacity. In Maharashtra, cotton acreage is expected to remain the same. Cotton area in central Maharashtra (Marathwada) is expected to shift to soybean, but will be offset by increases in cotton planting in eastern Maharashtra (Vidarbha). Recent Post travel to eastern Maharashtra indicates that farmers are showing confidence in planting cotton for the 2015 Kharif (monsoon crop) season, as the soybean crop for the past two years has been affected by delayed monsoon. Cotton's relative drought tolerance gives it an edge over competing crops as 65 percent of India's cotton area is rain fed. As of March 19, the overall water stored in reservoirs in Gujarat and Maharashtra was less (41 percent of capacity) than the corresponding period of the previous year (53 percent) and lower than the ten-year average (46 percent capacity). Marginal gains in cotton area in Madhya Pradesh are expected as farmers continue viewing cotton as one of their best planting options.

Southern India: Cotton Production Disappointing and Could Push Land Use Back to Traditional Crops

Planted area in the states of Andhra Pradesh and Telangana was 2.38 million hectares in 2014/15. Area in MY 2015/16 is forecast to decrease by 12 percent as MSP prices in the current season forced farmers to make distress sales. Expectations of another disappointing year for prices could prompt farmers to shift to crops like pulses, chilies and maize. Yields in the states are forecast below the three year average of 529 kg per hectare. In Karnataka, the area that had been shifted from maize to cotton is expected to return once again to maize.

MY 2014/15 Crop Estimated Lower as Prices Discourage Additional Pickings

The Post estimate for MY 2014/15 production has been revised 500,000 480 lb. bales lower than the USDA estimate to 30 million 480 lb. bales (38.5 million 170 kg bales/ 6.5 MMT). Farmers in the central cotton growing state of Maharashtra have limited the number of pickings of cotton due to lower price realization. Further, farmers lack incentive for additional pickings. The cotton harvested from third, fourth and fifth pickings are of lower quality (i.e., priced lower). Too, with seed cotton prices in major cotton growing states remaining below MSP and limited market demand or demand prospects, there is no reason to add labor and related costs to extend production and harvest more. Also, many farmers report that with distressed sales, they have been unable to recover the cost of production and are reluctant to add additional costs for marginal gains. Consequently, yields are expected to be lower than the three year average. Yields are also expected to be lower than the three year average in the northern states of Punjab and Haryana due to late rains in December that affected the crop.

Unseasonal Rains and Slow Arrivals for MY 2014/15 Crop

For MY 2014/15, total arrivals as a percentage of the total production estimate have reached 70 percent as of March 8, 2015. MY 2014/15 all India cotton arrivals, as reported by the Cotton Corporation of India (CCI), reached 21.9 million 480 lb. bales (28.1 million 170 kg bales/4.7 mmt), one percent lower compared to the previous year. Per day arrivals are averaging around 86,000 480 lb. bales (110,000 170 kg bales / 18,700 MT). State-wise, there is a major lag in arrivals in the central cotton growing state of Gujarat. Arrivals in Gujarat are slower by 13 percent compared to the previous year. Unusually wet weather in late February and March reportedly delayed deliveries and farmers have been busy with wheat and cumin harvest and the start of summer planting.

MSP Procurement Exceeds 7 Million Bales and Stocks Becoming an Issue

Total cotton procurement under MSP operations has crossed 7 million 480 lb. bales (9 million 170 kg bales) and surpassed the previous record procurement of 6.94 million 480 lb. bales (8.9 million 170 kg bales) set in marketing year 2008/09. As of March 17, 2015, the CCI, a government-run procurement and distribution company, had procured 6.6 million 480 lb. bales (8.5 million 170 kg bales/ 1.4 MMT), directly. States where CCI was the most active and had the highest procurement were Telangana, Andhra Pradesh, and Maharashtra. These three states contributed more than eighty percent of the total cotton procurement under MSP operations. In addition to the direct CCI procurement, the Maharashtra State Co-op Cotton Growers Marketing Federation Limited (MAHACOT) procured almost 430,000 480 lb. bales (550,000 170 kg bales).

The Government of India (GOI) has not announced the MSP for the 2015/16 season. In some years, the new MSP prices are not announced until planting nearly is completed. Seed cotton prices have been below MSP for most of the season. Sources believe the GOI could marginally increase the MSP for near-term benefit, but prices would remain depressed in the long term due to large government-held cotton stocks and sluggish global demand.

General Production Outlook – Small Holders Choosing Improved Varieties

Cotton, a predominantly monsoon-season or Kharif crop, is planted from the end of April through September and harvested in the fall and winter. With the area under Bt cotton and improved varieties now reaching an estimated 92 percent of total area, prospects for future growth in productivity are limited as most cotton is grown under rain-fed conditions and on small farms. Cotton plant populations are relatively low density in India because farmers leave rows large enough to traverse with a bullock and cultivator for weed control purposes. Lower plant populations are offset to some extent by the multiple pickings farmers obtain through manual, rather than machine, harvesting.

Researchers are working on production schemes with higher plant populations that could improve yields. There are an estimated 5.8 million cotton farmers with the average farm size of 1.5 hectares. Small holdings are seen to limit the ability to adopt capital intensive production technologies and infrastructure. Even without changing holdings, yields would likely benefit from improved irrigation, fertilizer, micronutrients, pests and disease management. Future growth in cotton production is more likely to come from higher yields rather than area expansion.

India accounts for about a third of global cotton area. Within India, two-thirds of cotton is produced in the central cotton growing zone; including, the states of Maharashtra, Madhya Pradesh, Gujarat and Odisha where much of the crop is rain fed. The northern zone, which consists of the states of Punjab, Haryana and Rajasthan, produces cotton under irrigated conditions and accounts for about 15 percent of production. In the south, the states of Andhra Pradesh, Karnataka and Tamil Nadu account for 30 percent of production. The Central and Southern zones typically grow long duration cotton that allows farmers to reap multiple harvests. While the number of pickings has declined as traditional varieties have been replaced by biotech hybrids, farmers can still extract up to five pickings per plant depending on weather conditions. In contrast, the irrigated cotton in the northern zone is mostly a short season crop that fits into a cotton-wheat cropping system.

Various federal and state government agencies and research institutions are engaged in cotton varietal development, seed distribution, crop surveillance, integrated pest management, extension, and marketing activities. In 1999, the federal government launched the Technology Mission on Cotton (TMC) to improve the availability of quality cotton at reasonable prices. The goal of the TMC is to bring about improvement in the production, productivity and quality of cotton through research, technology transfer, and improvement in the marketing and raw cotton processing sectors.

Biotech Cotton – Widely Adopted for Medium and Long Staple Cottons

Since its introduction in 2002, Bt cotton has been widely adopted and now accounts for an estimated 92 percent of total cotton area and over 95 percent of India's cotton production. The Government of India has approved six biotech events and more than 300 hybrids for cultivation in different agro-climatic zones. In addition to the approved varieties, there are estimated 40-50 Bt cotton hybrids that are developed and multiplied informally outside of regulated marketing channels and sold at cheaper rates relative to approved hybrids. One of the results of the adoption of Bt cotton has been a significant shift in the varietal profile and share of different types of cotton being produced in India. Most of the Bt hybrids are of medium and long staple cotton (26 to 32 mm) which has resulted in declining production of short staple (below 22 mm) and extra-long staple (35 mm and above) cotton. If the current trend continues, the domestic textile industry may seek to increasingly augment their extra-long staple and short staple cotton requirements through imports.

Consumption

Slow to Switch to CCI Supplies but Consumption Growing on Strong Domestic Indicators and Market Diversification

India's GDP growth is expected to continue stronger in 2015 and suggests that domestic consumption will at least remain firm and contribute to cotton consumption. MY 2015/16 consumption is forecast at 500,000 480 lb. bales higher at 24.5 million 480 lb. bales over current official USDA estimates for MY 2014/15. The textile sector remains in relatively good condition compared to a few years ago and industry capacity continues expanding. Despite China reducing its volume of cotton yarn buying from India in MY 2014/15, exports of cotton yarn, fabrics, and made-ups (blankets, bed linens, furnishing articles, etc.) have remained strong compared to previous years. Sources report that the industry continues enjoying strong margins as demand revives in export markets across Europe and in the United States. Cotton and cotton yarn prices are expected to remain relatively competitive in 2015/16, as mills will have ample fiber supplies to cater to both domestic and export markets. Per month average cotton consumption in MY 2014/15 is 1.95 million 480 lb. bales (2.49 million 170 kg bales/424,562 MT). For MY 2015/16, the average monthly cotton consumption is forecast one percent higher at 1.97 million 480 lb. bales (2.52 million 170 kg bales/428,917 MT).

Recent Post interactions with large textile mills in northern India indicate that the mills have been buying directly from terminal markets. Apart from prices being much lower than the MSP rates offered by the CCI, the terms of payment are much easier even though the quality available in the market may not be the highest grade. Trade indicates that mills will continue to procure directly as more than twenty five percent of arrivals are yet to reach the market. With market prices remaining depressed, large mills have coverage for about 3-4 months and smaller mills are covered for 1-2 months. It is expected that once the pace of arrivals slows down in the market, mills will look to source cotton for immediate consumption from CCI albeit at higher prices.

Man-Made Fibers and Yarns – More Active and Sportswear

The man-made fiber and yarns (MMF) industry (synthetic and cellulosic fibers) in India has not experienced as rapid growth as other countries due to the government policy skewed towards natural fibers. While the national textile policy discusses fiber neutrality, the GOI has set schemes geared towards promoting natural fibers. India produced 2.3 MMT of MMF and yarn in India fiscal year (IFY) 2013/14 (Apr/Mar), while consumption of MMF fibers and yarns in IFY 2013/14 was 1.94 MMT. Trade indicates there is low capacity utilization in India as demand is low, but consumption is rising and is expected to reach significant volumes in the next five years as younger generations are adapting to newer styles. Additionally, there is an increase in sales of active wear and the sportswear category with certain functional aspects. In terms of cost, Indian MMF production is competitive relative to other major producing countries like China, where energy and labor costs are on the rise. But infrastructure issues, capital costs, and central & state taxation at the fiber level make MMF a costly option for textile mills in India.

Trade

Export Market Diversification Essential for Indian Cotton Industry

MY 2015/16 exports are forecast at 5.5 million 480 lb. bales (7 million 170 kg bales/1.1 MMT). Exports are forecast higher as Indian exporters continue to explore new markets for cotton. India will continue to be a regional supplier to Pakistan and Bangladesh along with Southeast Asian markets like Vietnam and Indonesia. However, China being the biggest buyer in recent years will likely be the key determiner of India's volumes. Trade indicates that Chinese demand for imported cotton will be restricted to machine picked cotton. The Indian rupee has strengthened by 1.5 percent since January 2015, but has consistently traded between Rs. 60-64 per dollar over the past six months which has helped to support export volumes.

Indian cotton will remain competitively priced in the next season. The timing and the quantum of cotton stocks released by the CCI will affect domestic prices. Cotton ex-gin prices have remained low throughout the season due to low export demand. Indian ex-gin prices are currently 4-5 cents lower than the Cotlook A Index and are expected to remain flat during the remainder of the marketing year. Exports in MY 2014/15 have been revised to 4.8 million 480 lb. bales (6.1 million 170 kg bales / 1 MMT) based on trade data. Preliminary data indicates that shipments in MY 2014/15 have crossed 3.1 million 480 lb. bales (3.9 million 170 kg bales/675,000 MT) with four months remaining in the current season.

Imports in MY 2015/16 are forecast at 800,000 480 lb. bales (1 million 170 kg bales / 174,000 MT). With large domestic supplies, imports by mills are expected to be on an ad hoc basis where mills may import to cover their export commitments. The import estimate for MY 2014/15 is 1 million 480 lb. bales (1.2 million 170 kg bales/ 217,000 MT) and based on trade data.

Marketing

India exports medium-to-long staple cotton (25 to 32 mm length) to China, Bangladesh and Southeast Asian countries. However, India will likely continue to import ELS and quality long staple cotton (28-34 mm), with occasional imports of medium or short staple cotton (below 22 mm) when international prices are favorable. The United States has been the leading supplier of cotton to India over the past few years. Indian mills importing U.S. Pima and upland cotton recognize its quality and consistency and are ready to pay a premium over competing origins. However, U.S. cotton faces competition from suppliers like Egypt and Australia due to occasional freight advantages and shorter delivery periods. Due to warm weather conditions and tradition, cotton is typically the preferred fiber in India. However, poly-cotton blends are popular due to their durability and ease of maintenance.

Policy

Trade Policy – Taking Steps to Facilitate Trade

As India has emerged as a cotton exporter in recent years, the GOI has enacted a variety of trade policies to ensure that competitively-priced adequate supplies of cotton are available to the textile industry. India's national fiber policy affirms that cotton exports should be limited to exportable surplus. In December 2014, the GOI issued a new notification. The new policy removed the requirement that exports be registered with the regional Directorate General of Foreign Trade (DGFT) authorities. Cotton and cotton yarn exports are allowed under an Open General License (OGL) without any quantitative limit or quota. Based on the current 2015/16 forecast, India's exportable supplies are abundant and the policy may continue as the marketing year progresses.

Production Policy – Price Supports through MSP

The GOI establishes a MSP for seed cotton and sells the processed/baled cotton at market prices. Any losses incurred in the operation are borne by the government. New MSP prices are announced annually and may or may not precede the start of planting. The CCI, a government-run procurement and distribution company, is responsible for price support operations in all states. CCI is assisted occasionally by other federal or state government marketing organizations.

Value Addition to Cotton Critical to Indian Economy

The textile and clothing industry is largely cotton-based; accounting for 14 percent of total industrial production, 17 percent of total export earnings, 4 percent of GDP and provides direct employment to over 35 million people and indirect employment to an additional 55 million people. After agriculture, the textile industry is India's largest employer. The "organized" or modern textile sector is dominated by spinning units which, in terms of numbers, account for 80 percent of the "units" in the modern industry. Domestic demand is primarily supported by the higher consumption of readymade garments and home textiles due to rising income levels, a growing organized retail segment, and a rising consumer class. Cotton always faces competition from India's large man-made fiber industry.

India's textile industry would likely benefit from increased value addition in terms of weaving and garment manufacturing, but the industry continues to focus much of its effort on expansion of the spinning sector. The Indian textile industry includes both an "organized" sector (large-scale spinning units and composite mills) and an "unorganized" sector (small-scale spinning units, power looms, handlooms, hosiery units). More than 95 percent of yarn is produced in the organized sector. The weaving industry is mainly characterized by the unorganized sector, with power looms accounting for 59 percent, hosiery units for 26 percent and handlooms for 11 percent of total cloth production. The organized sector weaving mills account for the remaining four percent of cloth production.

According to the GOI, India ranks third in global exports of textiles and sixth in global exports of clothing with market shares of 5.3 percent and 3.3 percent respectively. The United States and China are the top markets for textile exports with Bangladesh also emerging as a strong market. Cotton textile exports account for 45 percent of total textile exports. Cotton ready-made garments account for the major share of cotton textile exports followed by cotton yarn and cotton fabric. Cotton yarn exports have been on OGL (not subject to quotas) since April 2011.

For the upcoming GOI 2015/16 fiscal year (Apr/Mar), the government has largely continued with major schemes in an effort to: 1) promote the export of value-added cotton textiles; 2) ensure affordable credit; 3) technology improvement; 4) skill development; and, 5) duty relief for the textile sector. India's current trade policy provides incentives to encourage textile exports such as favorable interest rates on pre-shipment credit, duty-free import of trimmings required by the garment industry, and duty-free import of tools by the handicrafts industry. Firms with export oriented unit status and firms importing against an advance export license receive a duty drawback on imports of raw materials for the export of value-added goods.

The Technology Upgradation Fund Scheme (TUFS): TUFS has provided support for the modernization of the textile industry since 1999 through lower rates of interest on loans for the purchase of capital goods and improved technology. TUFS has been approved for continuation for the entire 12th Five Year Plan (2012-2017). The Ministry of Textiles has not proposed a budget funding TUFS, yet, for fiscal year 2015/16 (Apr/Mar).

Scheme for Integrated Textile Parks (SITP): SITP provides the textile industry with infrastructure facilities for setting up their textile units. SITP has sanctioned 61 new textile parks. The scheme is based on a public private partnership model where the GOI's share is restricted to 40 percent of the project cost or $6.3 million (Rs. 400 million) whichever is lower. An additional grant of $1.6 million (Rs. 100 million) will soon be available to each new project to assist firms in the apparel sector. In 2014, 13 new textile parks were approved by the new government that will receive a government grant worth $83 million (Rs. 5.2 billion).

Scheme for Integrated Processing Development (IPD): IPD is a new scheme with an initial annual outlay of $80 million (Rs. 5 billion) to address the environmental concerns relating to effluent treatment.

Various Schemes for Handloom Sector: For the overall development of the handloom sector, the GOI has taken various policy initiatives to sustain and develop the industry. This is in addition to two existing programs, the $710 million Comprehensive Handloom Package (Comprehensive Handloom Development Scheme (which includes Marketing and Export Promotion); Cluster Development and Development and Strengthening of Handloom Institutions; Revival, Reform and Restructuring Package (RRR), and institutional credit. The GOI also implements various training programs under the Integrated Skill Development Scheme to upgrade skills and employability of the handloom weavers and the $430 million Revival, Reform and Restructuring Package.

Yarn Supply Scheme: The GOI approved the continuation of the Mill Gate Price Scheme (MGPS) which is now renamed as the Yarn Supply Scheme. The scheme covers weavers who are under privileged and in vulnerable groups by providing them subsidized yarn so that they can compete with the power loom and mill sector.

Scheme to Promote usage of Geotechnical Textiles in the North Eastern Region of India: The GOI launched a new scheme in 2015 to promote usage of Geotechnical Textiles in the North Eastern Region of India. The scheme is intended to boost infrastructure development by giving a particular thrust to the usage of geotechnical textiles in roads and highways construction.

State Textile Policies: In addition to the central government schemes, various state governments have announced new textile policies in recent years. The major cotton producing states of Gujarat and Maharashtra announced their textile policies in 2012, with several programs encouraging industries to locate their textile units in their respective states. Similarly in 2013, the southern state of Karnataka announced its new textile policy for 2013-18.

PSD Table - ELS COTTON (1-3/8" or 35mm staple length)

Units : 480 lbs. bales

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

Beginning Stocks

51,736

170,073

92,646

126,363

83,647

52,321

82,311

47,264

51,168

Production

156,162

140,546

132,738

171,778

187,394

163,970

156,162

152,258

140,546

Imports

258,882

86,544

209,399

117,350

109,220

225,192

128,923

140,546

132,738

Total Supply

466,781

397,162

434,783

415,492

380,261

441,484

367,396

340,067

324,451

Exports

-

-

-

-

-

-

-

-

-

Domestic Consumption

296,708

304,516

308,420

331,844

327,940

359,173

320,132

288,900

281,092

Ending Stocks

170,073

92,646

126,363

83,647

52,321

82,311

47,264

51,168

43,360

Total Distribution

466,781

397,162

434,783

415,492

380,261

441,484

367,396

340,067

324,451

India's ELS production is forecast to decline slightly as farmers shift to higher yielding long and medium staple varieties. There are very few Indian cotton varieties (DCH-32, TCH-213, and Suvin grown mostly in southern India) that meet international ELS specifications. The fiber quality and yields of these varieties have deteriorated in recent years causing marketing problems and lower returns to growers. Therefore, farmers are increasingly shifting to long staple varieties (Bunny, Brahma, and other 30-34 mm cotton varieties), which have higher yields and fewer quality problems. Efforts to improve the productivity of ELS parent lines have met with limited success. There are some early efforts to develop biotech ELS varieties.

ELS cotton consumption is forecast marginally lower reflecting lower imports and production. India's domestic consumption requirement for ELS cotton is largely met through imports. The United States, Egypt, Israel and Australia are the major suppliers. ELS cotton is used for the production of quality yarn, fabric, and dress material for a small but growing high-end domestic market segment and for export. Mills are seeking ELS, but only for quantities equal to their export orders. Local mills are increasingly using the long staple varieties for blending with imported ELS cotton for the production of quality yarn and fabric