Source: Financial Express

Weak prices drive govt procurement, but storage capacity does not match up

Banikinkar Pattanayak

New Delhi, Dec 30

AFTER wheat and rice, a crisis is looming over the storage of cotton, as the government is undertaking massive procurements in many regions to prevent distress sales by farmers after the fiber prices crashed below the statefixed benchmark rates despite a projected 5% drop in the country’s output.

The government has stacked up stocks of nearly 1.3 million bales in the third-largest producing state of Andhra Pradesh since the marketing year started on October 1, compared with the storage facility of around 1.7 million bales there, sources said.

The Cotton Corporation of India (CCI), the government’s biggest procurement arm, had procured a paltry 7,696 bales across the country during the entire 2011-12 marketing year. One bale equals 170 kg. The situation may worsenasprocurementisexpected to touch a record five million bales in Andhra Pradesh, out of the state’s projected crop size of 7.2 million bales in the year that started on October 1, sources said. The CCI is procuring 40,000-50,000 bales a day in the state, which means the storage facility will be exhausted in the next few days.

Although prices in top two producers — Gujarat and Maharashtra — are somewhat holding up as of now, a slump in export demand has raised fears of massive procurement operations, And consequent storage crunch, unless cash starved textile mills’ ability to stock up improves significantly. The CCI board will meet on Monday to review procurement and decide on the next course of action.

The sources said the government is considering a sale plan to ease storage, although the decision would be a tough one to take. “If the government sells cotton from its reserves to textile mills at a discount, domestic prices may fall further. If it sells to traders at lower rates, mills will complain the government is forcing them to import while favouring exporters. So, it will be a difficult decision,” said one of the sources.

The government may have to incur losses of more than R600 crore if stocks are offloaded to vacate space, he added. The CCI recently drew up a preliminary road map to procure a record nine million bales from farmers, entailing a cost of R16,470 crore, and also projected losses of R2,430 crore on such purchases.

Farm co-operative Nafed, too, had expressed willingness to procure three million bales, worth approximately Rs 5,500 crore. Government agencies usually buy cotton at the minimum support prices (MSPs) and sell stocks later at market rates. Losseson account of procurement operations are reimbursed by the government.

Strong Chinese demand had driven up domestic prices torecordlevelsin2011-12.With cotton exports reaching an alltime- highof 12.9millionbales, or roughly 37% of domestic output, reducing the requirement of government procurement. However, as cotton inventories from China to Australia are bulging with a record glut a year after all-time high prices encouraged farmers to expand output, demand for Indian supplies has dwindled significantly this year.

Prices in many parts of Andhra Pradesh were ruling below the MSPs by up to Rs 105  (around3%)  a quintal as of Friday. Importantly, unlike grains, which can still be stored in open fields for some days in times of emergency, keeping cotton in unscientific conditions poses utmost risk as the fibre is highly inflammable. “The problem is the government can't slow down procurement, considering its social obligation to help farmers. But if it sells the commodity it has procured now, it will face Losses as market prices are lower. And if it shifts the fiber to other states where the storage facility is available, the cost of transportation is involved. So in any case, some losses would have to be incurred to ease space,” said one of the sources.

While cotton procurement has started in some parts of Maharashtra, prices in Gujarat are still above benchmark rates. Industry executives say many farmers have been holding back stocks in Gujarat, keeping prices in the state above the MSPs. The country's cotton output is forecast to drop 5.1% to 33.4 million bales in 2012-13, while consumption by mills is pegged at 25 million bales, according to the state-backed Cotton Advisory Board.

(Source: Financial Express)