India, China Set For Cotton Wars On Stubborn Yields.

India, the world's second biggest exporter of cotton, could turn into an importer within three or four years as production peaks out because of falling yields, forcing the country's textile mills to compete for supplies with top importer China.

Despite rising acreage, India's cotton yields are down to about 475 kg per hectare, or 38 percent below the global average, as plants need to be spaced widely for hand picking, in contrast to other leading growers, such as the United States and Australia, which use machines.

Acreage is limited not just by land constraints and fluctuations in weather and prices, but also government efforts to push farmers to grow more food over cash crops such as cotton, to try and limit galloping food inflation.

"The cotton surplus situation in India will disappear in the next three to four years and mills either have to use expensive imported cotton or opt for man-made fibres," said Sunil Khandelwal, chief financial officer of Alok Industries

, India's largest textile maker by turnover. India's cotton output will reach a record peak of about 6 million tonnes or 35 million bales of 170 kg each in the year to September 2012 before beginning to decline, Khandelwal said.

Global prices then may deter Indian farmers from boosting acreage of the crop as supplies increase from Australia, Brazil and African countries. Such a scenario would pit India against giant Asian neighbour China, which depends heavily on imports from the United States, the world's biggest producer.

The two Asian nations together consume 60 percent of world cotton output. Cotton was last year's top performing commodity, a status it retained in the first quarter of 2011, attracting huge speculative interest that peaked in the third quarter of last year, although supply competition has cooled prices since.

FUTURE COMPETITION WITH CHINA

China is the world's largest exporter of textiles, with a global market share of 28.3 percent last year, or 6.6 times India's share of 4.3 percent, Indian government data show. Indian firms go head-to-head with China along with other Asian countries such as Pakistan, Bangladesh and Vietnam in the export of textiles and apparel to Europe and the United States. If India becomes a net cotton importer then its companies will have to vie with Chinese firms for supplies.

"We are already competing against Chinese companies for other resources and we may have to compete with them for cotton supply also in the near future," Khandelwal said. Chinese experts concurred, saying the country's higher-end textile sector would drive a greater demand for cotton.

Chinese cotton consumption in 2010/11 stood at about 10 million tonnes against an annual output of 6.6 million tones.

Just as in India, cotton acreage in China is competing with food grains, which receive larger government subsidies. "India has great potential to develop its textile industry, and it may became a net cotton importer in the coming five to six years with the development of its textile industry, competing for resources with China," said Guo Rongmin , China business manager with Cotlook Ltd., which publishes Cotton Outlook.

China's cotton demand is expected to rise to 13 million tonnes by 2015. A senior Chinese official said in June it was tough to boost China's cotton output, which dropped 6.9 percent to 5.96 million tonnes last year. There is no official Chinese government target for cotton output in 2015.

Consumption by India's domestic textile industry is expected to reach 7.02 million tonnes by 2019/20, with demand being boosted by a move among its people away from polyester, and surging apparel exports. Inevitably competition for raw cotton between the fellow Asian giants will fuel price volatility in global markets.

"Obviously there will be bullish impact on global prices of cotton, but it is difficult to quantify as there are many factors, such as demand from the U.S., Europe and production of natural fiber in other parts of the world on which prices would depend," said Ajitesh Mullick , head of agriculture research at Religare Commodities.

COTTON DEMAND

As last year's record prices encourage farmers to plant more of the crop, cotton acreage in India, the world's second biggest producer, may rise by up to 15 percent in the year to September 2012.

"Farmers in India, lured by the high prices of cotton, are sowing the natural fiber in more areas, (but they) may not get as high returns as they got last year," said Ritesh Agrawal, chief executive of trading firm Wisdom Cotton .

With prices unlikely to touch last year's record highs in the cotton year to September 2012, however there could be a gradual decline in India's cotton cultivating area from next year, officials said.

"There is a strong possibility that even if cotton productivity increases in India, it will not be enough to meet the growing demand for cotton in the country, and we may again become a net importer of cotton," said textile industry official D.K. Nair, referring to the period until the 2002/03 cotton year, when low yields made India a net importer of cotton.

India's cotton demand has risen roughly in line with economic expansion of 8.5 percent to 9 percent a year largely over the last four years, growing 25 percent to 4.6 million tonnes in 2010/2011 from 3.72 million tonnes in 2005/06.

India's cotton year runs from October of one year to September of the next. Between 2005/06 and 2010/11, India's cotton output increased 31 percent to 5.3 million tonnes, largely driven by a 26 percent surge in acreage to 11 million hectares in the last season from 8.7 million in 2005-06.

But increasing acreage does not mean higher productivity. "In India, poor harvesting skills and lack of irrigation facilities, coupled with non-availability of quality seeds, are mainly responsible for low productivity," said Usha Barwale Zehr, chief technology officer of Maharashtra Hybrid Seeds Co. (Mahyco), which has a joint venture with Monsanto Biotech.

DECLINING YIELD

In 2001/02, India's cotton area was 27 percent of the global area under cotton and production was just 12 percent of the world total, because Indian cotton productivity was the lowest. By 2007/08, yield had doubled thanks to use of higher quality seeds. But productivity has fallen steadily since, declining 14 percent from a record high of 554 kg per hectare in 2007/08.

Among major cotton growing countries, Australia tops the productivity charts at 1,579 kg per hectare, followed by Brazil at 1,480 kg per hectares and China at 1,301 kg per hectare. This is because handpicking requires Indian farmers to sow just about 12,000 plants per hectare although in some areas of China, farmers plant up to 150,000, while in Australia the number stands at 85,000.

Besides that, India's cotton growing areas rely on annual monsoon rains, and growing pest attacks cripple yields. "Even if there is some improvement in productivity, Indian climatic and soil conditions are such that productivity will remain lower than the global average," said D.K. Nair of the Confederation of Textile Industries.

Source : economictimes.indiatimes.com