India Bans Cotton Exports; Ministers to Reconsider

7 March 2012

India announced the immediate prohibition of cotton exports on Monday. The move from the world's second largest cotton exporter caused a stir in market prices and surprised political officials. A group of the country's ministers is expected to review the decision later this week.

Agriculture minister Sharad Pawar told reporters that he had been "kept in the dark" on the issue and that cotton farmers would not be able to handle lower prices. He called for an end to the ban, which was instituted by the Directorate General of Foreign Trade.

In an emailed statement, the International Cotton Association said that the ban would "undermine India as a reliable trading partner" and "have serious consequences and a major, detrimental impact on world cotton trade."

Dismayed, the trade association noted that the ban came without prior "communication" and that similar actions in 2010 lead to a surge in the number of cases brought to it for arbitration of contracts that were not honoured, a function of the organisation. Notably, the government recently indicated that it may reverse course and allow existing contracts to be fulfilled.

High prices in recent years have stimulated cotton production, even as increases in consumption have remained modest. Some critics of the export ban have therefore questioned the necessity for a market intervention on behalf of domestic textile producers.

A ban of Indian cotton exports in 2010 preceded a price spike - peaking at US$2.27 a pound - more than twice its current value. Farmers around the world responded by planting more cotton.

Armelle Gruere of the International Cotton Advisory Committee told Bridges that increased production has lead to expectations of a global surplus, with total production for the 2011/12 season projected at 27.2 million tonnes and consumption at 23.4 million tonnes. Global stocks of the commodity are up 40 percent, Gruere added.

She warned that the effect of the Indian ban will depend on how long it lasts.

Similarly, the Australian Bureau of Agriculture and Resource Economics and Science predicts a 10 percent drop in cotton prices over the course of 2012 and 2013 due to increased output.

An official from a leading cotton exporter, speaking on condition of anonymity, told Bridges that the recent Indian measure was "not good for predictability" and that it would lead to uncertainty in other parts of the cotton supply chain.

However, he added that the recipients of state aid may argue for payments "related to price volatility" through crop insurance schemes, since target prices qualifying farmers for support payments are politically unpalatable in the US given record farm incomes.

There might be a silver lining for other exporters in India's ban. Australian Agriculture Minister Joe Ludwig told a Canberra audience on Tuesday that the Indian measure was an opportunity for farmers from his country to "build on overseas markets."

"Cotton Soars After India Bans Exports," ASSOCIATED PRESS, 5 March 2012; "Cotton Exports Ban: Gujarat Chief Minister Narenda Modi Seeks Explanation from Centre," BUSINESS TODAY, 6 March 2012; "Cotton Prices Jump as India Bans Exports," FINANCIAL TIMES, 6 March 2012; "Manmohan directs GoM to urgently review ban on cotton exports," THE HINDU, 7 March 2012; "Sharad Pawar Challeges Cotton Export Ban," REUTERS, 6 March 2012.

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