India cotton supplies drop on bank note chaos

COTTON supplies at Indian markets dropped by more than half after Prime Minister Narendra Modi’s surprise move to withdraw and replace high-denomination bank notes.

Prices have already climbed about 4% as farmers withhold supplies, Aurobinda Gayan, vicepresident for research at trader Kotak Commodity Services Ltd., said in an interview on Tuesday. They may climb further through early next week before retreating, he said.

The move to withdraw 500 and 1,000-rupee bank notes has dented the confidence of farmers in the world’s biggest producer of cotton as they largely sell their harvest for cash. With long queues outside banks and post offices to exchange or withdraw new bills, cultivators may be withholding sales until cash shortages ease.

“The farmers normally don’t want to go to the bank but when there is no alternative they will start accepting checks,” Laxmi Narayan Gupta, a director at Tikamsa Dulichand Natural Fibers Ltd., which trades and processes cotton, said in a telephone interview. “It will take some time, maybe about a month, for the situation to normalize and until that time cotton prices will keep rising.”

Cotton arrivals in wholesale markets have fallen as low as 60,000 bales a day, down from as much as 140,000 bales before the prime minister’s Nov. 8 announcement, Mr. Gayan said. Prices climbed to as much as 39,500 rupees ($584) per candy ( 356 kilograms) in the physical markets, from 37,900 rupees, he said.

The “majority of the payments to the farmers are made in cash and that’s why farmers are not bringing cotton to the market,” Dhiren Sheth, president of Cotton Association of India, said by phone on Tuesday. “It will take a week to 10 days for the situation to normalize.”

Cotton yarn demand will be weak at least for a month as the cash crunch will potentially curb demand, said Mr. Gupta, who’s been trading and processing cotton for three decades. “The payment system has to improve and that will set a better trend for the future trade,” he said

Cotton output in India may climb to 35.1 million bales in 2016-17, from 33.8 million bales a year earlier, according to Textile Ministry.