The Looming Indian Bear

By Gary A. Raines|March 9, 2009

In the September issue of Cotton International, Globecot discussed six factors shaping the global cotton market, both now and likely in the future. The increasing impact from one of those factors – India – cannot be overstated. Already the world’s largest planter of cotton, India has grown in recent years to become the second-largest producer, exporter and mill consumer of cotton. We believe potential still exists for Indian harvests to expand further in coming years – even with little increase in area. This could dramatically alter the landscape of the global cotton trade and have a long-term bearish impact on price, arguably overshadowing shifts in market fundamentals from any other country.

In recent years Indian cotton production has been on a tear. Indian farmers regularly plant between 7.5 and 9.5 million hectares (18.5 and 23.5 million acres) per year of cotton, a number little changed over the last 50 years. What has changed is yield. After trending horizontally over the previous decade, beginning in 2003 yields began to rocket higher, climbing 93% from an average 239 kilograms per hectare (268 pounds per acre) six years ago to a forecasted record of 461 kilos (517 pounds) in 2008. Perhaps not coincidentally, it was also in 2002 that Indian farmers first began to plant transgenic cotton varieties. Since then, land planted to Bt cotton varieties has steadily risen, reaching a record-high estimate of 76% of total plantings this season. It is largely through these yield increases that production jumped each of the last several years, reaching a record 5.4 million tons (24.6 million 480-lb bales) last year, propelling India to become the world’s second-largest producer.

What is even more impressive is the notion that Indian yields still do not match the world average. Global cotton yields are expected to average 620 kilos per hectare (695 lbs/acre), just down from last year’s record 627 kg/ha average. If plantings remain flat and Indian yields increased in future years to only match the world average – by increasing just another 159 kilos (178 pounds) – this would add over 1.7 million tons (over 8 million bales) to the global supply. Since India’s crop size continues to outpace Indian mills’ demand for cotton, this excess supply often gets exported. Accordingly, any further increase in Indian supplies also is likely to find a home abroad. This has major ramifications both on global trade patterns and price.

In a typical recent year, countries around the world trade roughly 8 million metric tons (38 million bales) of cotton between one another. If the largest cotton planter in the world increases yields to meet the world average, this could add another 21% to global exportable supplies. Of course, if world demand does not increase a comparable amount by then, global imports will not rise as high. This implies the increased Indian supplies will compete with, and displace, cotton from other exporting countries for a relatively smaller import market. With exportable supply outpacing import demand, this is bearish for price. On a smaller scale, this is already occurring. Prior to the 2003 jump in yield and concomitant increase in production, India was not a major cotton exporter, never shipping more than a quarter million tons (1.2 million bales) in a year. But since then, exports ballooned in step with soaring yields, reaching a record 1.5 million tons (7.2 million bales) last year. Fortunately, over the same period, global imports increased in step, largely owing to increased Chinese purchases. However, if waning global economic growth impedes world mill demand as is anticipated to happen this year and perhaps next year, several countries around the world will not need to buy as much cotton. In turn, the world cotton market may face renewed price pressure from a relatively new source: the Indian cotton bear.

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