Report Highlights:

India’s 2014/15 cotton production is forecast at 28 million 480 lb bales (6.3 mmt) from 11.8 million hectares, down 1.0 million 480 lb bales from 2013/14. Projected area is the third highest on record while yields are expected to drop closer to recent averages following the strong performance of the 2013 monsoon. Cotton consumption is expected to increase to 23.5 million 480 lb bales as yarn exports and strong domestic demand steer cotton to India’s growing textile sector. Exports are forecast 25 percent lower at 6.0 million 480 lb bales. Exportable supplies are likely to compete more directly with domestic demand as supplies tighten in response to lower production. India has emerged as a significant regional exporter and supplier of cotton to China in recent years. While regional exports are expected to continue at current levels, Chinese demand and trade policies will likely have a significant effect on India’s 2014/15 overall export volumes.

Production

India’s 2014/15 cotton production is forecast at 36 million 170 kg bales (28 million 480 lb bales/6.3 mmt) from 11.8 million hectares, the third highest area on record. Farmers have shown a consistently strong preference for cotton relative to other crops in recent years. With competitive cotton prices, planted area is expected to increase by 100,000 hectares from 11.7 million hectares in MY 2012/13. Production is expected to decline by 1.2 million 170 kg bales (1 million 480 lb bales/217,000mt) based on a forecast yield of 520 kg. After several years of spotty monsoon performance, yields were exceptionally good in 2013/14 following a strong monsoon. Lower forecast yields assume normal monsoon performance.

Northern India:Cotton in the northern states of Punjab, Haryana, and Rajasthan is irrigated and area is generally stable from year to year. Yields are forecast lower than a year ago but similar to the five-year average. The north typically starts the cotton harvest early and late monsoon rains can lead to dropped bolls and lower yields as harvest progresses. Area is forecast five percent lower as farmers are expected to shift to less labor intensive crops. Farmers cite rising labor costs for the harvesting of cotton as a concern. 

Central India: Given Gujarat’s role as a key supplier of cotton to export markets and the adequate ginning capacity in the state, farmers are expected to maintain MY 2014/15 planted area to 2.8 million hectares if monsoon rains cooperate. Assuming that prices remain firm as new-crop planting approaches, farmers are expected to favor cotton over competing crops. Cotton’s relative drought tolerance also gives it an edge over competing crops as 65 percent of India’s cotton area is rain fed. Overall water storage in reservoirs in Gujarat and Maharashtra during the current year is better (53 percent of total live storage capacity) than the corresponding period of last year (39 percent) and the ten-year average of 44 percent. In Maharashtra, which accounts for more than 35 percent of India’s cotton plantings, area is expected to be largely unchanged from a year ago as farmers continue to view cotton as one of their best kharif (summer) planting options. Similarly in the central state of Madhya Pradesh, area is forecast unchanged. 

Southern India:Cotton area in Andhra Pradesh, India’s third largest cotton producing state was 2 million hectares in 2013/14. Area is expected to increase by five percent as firm cotton prices prompt farmers to shift some area from crops like pulses, chilies, maize, and soybeans to cotton. Yields are forecast below the five-year average of 554 kg per hectare. Andhra Pradesh often receives late season storms, but if weather conditions are optimal during harvest, yields could be higher. In Karnataka, firm prices are expected to give a moderate boost to area. 

While yields have increased from an estimated 300 kg per hectare to over 500 kg per hectare over the past decade with the introduction of biotech seeds, better hybrids and expanded surface irrigation in some areas, there is concern within the industry that yields are stagnating or even declining. The increasing prevalence of “sucking insects” such as whitefly, the need for better micronutrient and fertilizer management, the spread of cotton into more drought prone areas and occasionally inconsistent seed quality are all cited as factors affecting yields. Overall yields are forecast at 521 kg per hectare, down from 2013/14 when favorable monsoon rains pushed yields well above the five year average of 514 kg per hectare. India’s cotton yields continue to be significantly lower than the global average of 761 kg per hectare, a difference due, in part, to the relatively low plant populations that farmers deploy in order to create rows that are wide enough for bullocks to traverse. The advent of biotech cotton has helped to improve the predictability and stability of cotton as a crop which has supported the expansion of cotton area in recent years. 

Minimum Support Price Not Announced: The Government of India has not announced the minimum support price (MSP) for the 2014/15 crop year. While prices vary by variety, the 2013/14 MSP for the most commonly traded staple length was increased 2.5 percent from Rs. 3,850 per 100 kg (32 cents\lb) of seed cotton to Rs. 3,950 per 100 kg (33 cents\lb). While cotton prices traded well above the MSP for most of 2013/14 season, only 40,000 170 kg bales (31,200 480 lb bales / 6,800 mt) of cotton procurement has taken place on the part of the public-sector Cotton Corporation of India under MSP operations. It is difficult to predict the timing of the 2014/15 MSP announcement, some years the new prices are not announced until planting is nearly complete. Seed cotton prices are currently 25 percent higher than the MSP. Assuming domestic prices continue to rise prior to the onset of the 2014 harvest; the MSP could be increased without exceeding prevailing market prices. 

Unseasonal Rains Slow Arrivals: On March 18, 2014, MY 2013/14 cotton arrivals, as reported by the Cotton Corporation of India, had reached 26 million 170 kg bales (20 million 480 lb bales/4.42 mmt) compared to 27.5 million 170 kg bales (21.4 million 480 lb bales/4.67 mmt) a year ago. The pace of daily cotton arrivals slowed due to unseasonal showers and hailstorms in late February and early March in northern India and the states of Maharashtra, Madhya Pradesh, and Andhra Pradesh. Trade reports indicate that the erratic weather has damaged Rabi (winter) crops in these states and farmers have put off the transportation of their remaining kharif (summer) crops (such as cotton) to terminal markets. Industry sources also indicate that farmers are holding cotton in anticipation of higher prices. With the spread of cellular phones and mobile market information services, farmers are increasingly able to make more informed crop marketing decisions. For MY 2013/14, total arrivals as a percentage of the total production estimate have reached 70 percent as of March 18, 2014; compared to 75 percent in MY 2012/13. 

General Production Outlook: 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 93 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 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 if they gain popularity with farmers. There are an estimated 5.8 million cotton farmers with the average farm size of 1.5 hectares which limits their ability to adopt capital intensive production technologies and infrastructure. However, yields would likely benefit from training in the management of irrigation, fertilizers, micro nutrients, pests and diseases to boost yields above current levels. Future growth in cotton production is more likely to come from higher yields than a significant 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 in 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 pickings or harvests. While the number of pickings has declined as traditional varieties have been replace 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 duration crop that fits into a cotton-wheat cropping system. 

Various central 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 central government launched the Technology Mission on Cotton (TMC) to improve the availability of quality cotton at reasonable prices. The goal of the TMC is bring about improvement in the production, productivity and quality of cotton through research, transfer of technology and improvement in the marketing and raw cotton processing sectors. 

Biotech Cotton: Since its introduction in 2002, Bt cotton has been widely adopted and now accounts for an estimated 93 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 is resulting in declining production of short staple (below 22 mm) and extra-long staple (35 mm and above). 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

MY 2014/15 consumption is forecast 500,000 480 lb bales higher at 23.5 million bales (5.1 mmt). The textile sector is in relatively good condition compared to a few years ago and capacity in the industry continues to expand. Major production states like Gujarat and Maharashtra are taking steps to attract textile industry investment nearer to cotton production. The industry has enjoyed strong spinning margins throughout much of 2013/14 and is on pace to export a record volume of cotton yarn. China continues to be a major buyer of Indian yarn and is expected to continue buying barring a significant change in pricing or trade policies. The Indian rupee has strengthened nearly three percent versus the dollar over the past two months, but is still 35 percent below the value of two years ago, suggesting that Indian yarn export prices could remain relatively competitive during 2014/15. Per month average cotton consumption in MY 2013/14 was 2.2 million 170 kg bales (1.7 million 480 lb bales/374,000 mt). While India’s GDP growth has cooled of late, the economy continues to grow at an enviable rate of five percent, suggesting that domestic demand will at least remain firm and contribute to cotton consumption. 

Trade

2014/15 exports are forecast at 6.0 million 480 lb bales (7.7 million 170 kg bales/1.3 mmt). India is expected to again be a regional supplier to Pakistan and Bangladesh along with Southeast Asian markets like Vietnam and Indonesia. However, China will likely be the key determiner of India’s export volumes. While steps have been taken by India’s Cotton Advisory Board and USDA to increase the supply of cotton in recent historical estimates, India appears to be headed for a year in which exportable supplies will be constrained by domestic demand and lower production. As always, the Government of India is expected to monitor the pace of exports and could seek to implement measures to ration exportable supplies to conserve supplies for the domestic textile sector. The rupee has consistently traded at Rs. 60-64 per dollar over the past six months which has helped to support export volumes. If the rupee continues to strengthen, as it has over the past two months to Rs. 59 per dollar, India’s price advantage in export markets could be curbed.

Exports for MY 2013/14 are estimated at 10.0 million 170 kg bales (8 million 480 lb bales/ 1.7 mmt), as strong demand from China, and competitive pricing spurred exports. Trade sources indicate that export shipments for MY 2013/14 had reached 8.8 million 170 kg bales (6.8 million 480 lb bales/1.5 mmt) through mid-March with four months remaining in the marketing season. China, Bangladesh, Pakistan and Vietnam are the biggest export markets for Indian cotton. The pace of exports is expected to taper starting in April, but the margin between Indian ex-gin cotton and the Cotlook A index has doubled to nearly 10 cents per pound which could direct foreign demand to India and push the pace of exports higher than expected over the next few months. 

India typically imports long staple cottons to augment domestic supplies for processing and re-export as high-end textiles. However, in recent years, mills, particularly in the south have begun to import medium staple cotton from West African nations and other sources to augments supplies. These imports typically occur from August to November prior to the onset of the Indian harvest. While 2013/14 imports are expected lower at 600,000 480 lb bales, imports are expected higher in 2014/15 given the relatively tight supply situation. 

Policy

As India has emerged as a cotton exporter in recent years, the Government of India has enacted a variety of trade policies to ensure that competitively-priced adequate supplies are available to the textile industry. India’s national fiber policy affirms that cotton exports should be limited to the exportable surplus. Cotton exports are allowed under Open General License subject to relatively strict export registration requirements, but are not currently subject to a quantitative limit or quota. Based on the current 2014/15 forecast, exportable supplies could be limited which will likely prompt close monitoring of the exportable supply of cotton as the marketing year progresses. 

In MY 2013/14, Government of India announced the establishment of an online reporting system for ginners and others in the cotton trade aimed at enhancing cotton data collection. Government of India has been requesting the cotton trade (cotton producers, ginners, bale pressers, traders etc.) to voluntarily register their unit/firm with textile commissioner’s office and file monthly cotton statistics related to ginned cotton production and consumption. It is not clear when the system will begin to produce data that facilitates the analysis of the Indian cotton sector. 

To improve and facilitate the export clearance process, Government of India issued a notification amending the procedure for the issue of registration certificates (RCs) for export of various commodities such as raw cotton and cotton yarn. The announcement simplifies the export registration process by eliminating the need for exporters to submit hard copies of the documents when submitting their online export registration application. 

Production Policy

The Government of India establishes a minimum support price for cotton. New prices are typically announced annually and may or may not precede the start of planting. The Cotton Corporation of India, a government-run procurement and distribution company, is responsible for price support operations in all states, but is occasionally assisted by other federal or state government marketing organizations.

Government agencies purchase seed cotton at the minimum support price and sell the processed cotton at market prices. Any losses incurred in the operation are borne by the government. 

The Cotton Corporation of India occasionally buys cotton at market prices to trade commercially, procuring 400,000 170 kg bales (312,300 million 480 lb bales/68,000 mt) under its commercial operations in 2013/14. Because market prices have been well above the minimum support price for most of the season, only 40,000 170 kg bales (31,200 480 lb bales / 6,800 mt) procurement has taken place in 2013/14 to support market prices. 

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 their freight advantage 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. 

Value Added Cotton

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 providing 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 the 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 61 percent, hosiery units for 23 percent and handlooms for 11 percent of total cloth production. The organized sector weaving mills account for the remaining five percent of cloth production. 

According to the Government of India, 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 50 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 “Open General License” (not subject to quotas) since April of 2011. 

For the upcoming 2014/15 fiscal year (Apr/Mar), the Government of India has largely continued with major schemes in an effort to promote the export of value-added cotton textiles, to ensure affordable credit, technology improvement, skill development and duty relief to 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 yet for fiscal year 2014/15 (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 Government of India’s share is restricted to 40 percent of the project cost or $7.3 million (Rs. 400 million) whichever is lower. An additional grant of $1.8 million (Rs. 100 million) will soon be available to each new project to assist firms in the apparel sector. 

Scheme for Integrated Processing Development (IPD):IPD is a new scheme with an initial annual outlay of $92 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 Government of India 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), Institutional credit, etc. The Government of India also implements various training programmes under 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 Government of India approved the continuation of the Mill Gate Price Scheme (MGPS) now renamed as Yarn Supply Scheme. The scheme will cover the weavers who are under privileged as also vulnerable groups, by providing them subsidized yarn so that they can compete with the power loom and mill sector. 

State Textile Policies: 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.

The Karnataka textile policy aims to promote and develop the textile and garment sector by providing incentives for investing in the sector and augmenting the overall capacity of the industry. Incentives include a land acquisition subsidy (reimbursement of between 25–50 percent of the cost of land acquisition), a capital investment subsidy (15-20 percent capital investment subsidy on the value of fixed assets), a power subsidy, and select tax reimbursements. 

The Gujarat Textile Policy will provide a five year interest subsidy on new plants, a power tariff concession for five years and a refund of the valued added tax on raw materials for new units and the expansion of existing units. The policy is aimed at bringing additional textile processing capacity closer to growers in India’s leading cotton producing state. Gujarat currently supplies a large volume of India’s cotton exports. 

In Maharashtra, interest subsidies are being provided on long-term loans for setting up new units. Lower income areas are also receiving a ten percent capital subsidy for new textile units in Vidarbha, Marathwada, and northern Maharashtra. A significant volume of cotton is shipped out of Maharashtra to states where there is greater processing capacity; these measures are aimed at keeping cotton in the state and creating jobs. Over the next 5 years, some processing capacity may shift from the south (where about half of India’s cotton is processed) to the central states, especially if power shortages persist in the south.

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 and the United States, Egypt 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 still 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