Hike in MSP may hurt paddy, cotton exports
As the Centre plans to increase the minimum support price (MSP) of major kharif crops for the 2018-19 season, one big question is the impact it will have on the export competitiveness of crops such as paddy and cotton, which have seen a surge in demand due to favourable global factors.
Most experts and market watchers said while there might not be a big dent in exports or export competitiveness of Indian cotton and paddy immediately, these products might become uncompetitive if prices in the international markets fell.
This, in turn, could dent farmers’ income, which has seen slow growth in the last few years.
The MSP of the medium staple cotton variety for the 2017-18 season is ~4,020 a quintal, while that of the long staple variety is ~4,320 a quintal. This is 4.1 per cent and 3.8 per cent more, respectively, than the MSPs fixed for the previous years.
Experts said if the Centre announced an MSP that was 50 per cent more than the A2+FL cost, the new MSP of medium staple cotton for the 2018-19 season could be around ~5,100 a quintal, while that of the long staple variety could be around ~5,400 a quintal.
Sources said even if the MSP of kapas, in terms of cotton, was around ~5,450 a quintal, it would be lower than the prevailing international price of US cotton, which was ~145-150 a kg, while that of Indian cotton would be ~132-135 a kg.
Cotton prices in the domestic market have moved sharply in the last few months due to good global demand and concerns over planting.
In a recent note, rating agency Icra said the surge in domestic cotton prices, from ~115 a kg in March-April to ~134 a kg in June for the Shankar 6 variety, would aid the profitability of the domestic spinning sector in the near-term.
As a result, the trend of recovery in profitability that started in the fourth quarter of 2017-18, after two consecutive weak quarters, is expected to gain momentum during the first half of 2018-19.
“The improvement is expected to be stronger for well-stocked spinners that were able to build up low-cost cotton reserves in December when domestic cotton prices had dipped, bringing down their weighted average raw material costs,” said Jayanta Roy, senior vice-president and group head at Icra. According to Icra, international cotton prices witnessed a sharp surge and reached four-yearhigh levels during the six-month period ended May. This is due to the evolving cotton scenario in China and speculative buying.
“While prices stabilised in the last week of June after surging 5-6 per cent in the first few weeks of the month, these continue to be 10 per cent higher, year on year,” Icra said.
However, Indian cotton prices increased at a much slower pace in January-May amid adequate stocking by spinners during the harvest period. This resulted in the widening of the spread between Indian and international cotton prices to 18 per cent, compared to a normal spread of 2-5 per cent, the ratings agency said. How much of this spread sustains in the coming months remains to be seen as Indian prices are expected to rise, while there is a possibility that global cotton markets may correct. If that happens, the competitiveness of Indian cotton exports could be affected.
“If the Cotton Corporation of India increases its buying at the new MSP to support farmers, there might be a cascading impact on the domestic market,” a representative from an international trading firm said.
A similar situation holds true for paddy. The freight on board price of Indian non-basmati rice is expected to be $400-410 a tonne, assuming that the MSP is increased by ~200 to ~1,750 a quintal for the 2018-19 season for common grade rice.
According to the World Bank, in May, the average global price of Thailand rice with 25 per cent brokens was around $436 a tonne and that of rice with 5 per cent brokens was around $450 a tonne.
This means that at the current rate, Indian non-basmati rice has to catch up with international markets. However, it could be temporary, given the volatile nature of international markets.