Low Prices and Government Intervention in

India
Can Expansion in Cotton Consumption and Trade
be Sustained
Low Prices and Government Intervention in India

WHY ME?
I’m not Indian
14 Years Since Visiting
I Didn’t Go For Business
 Why me?
• 14/15 World’s Largest Producer
• 13/14 World’s 2nd Largest
Exporter
• 14/15 World’s 2nd Largest
Consumer
• 2014 World’s Largest Yarn
Exporter
Low Prices and Government Intervention in India

THE HEART OF THE MATTER

 The Heart of The Matter
• What is the impact of Government policy?
• Will that policy change?
• What role will CCI play?
• What is the driver of Indian consumption growth?
• Will India remain a significant exporter?
 Disclaimer

“In the long run we

are all dead”
Tract on Monetary Reform, John Maynard Keynes 1923
Low Prices and Government Intervention in India

GOVERNMENT POLICY: MINIMUM SUPPORT

PRICE
 Indian MSP
MSP v NYF • Seed cotton price is underwritten
4500 160

4000
2014/15 by government (CCI)
140

3500
120
• Different level by variety/staple
INR per Qunital of seed cotton

3000 2008/09
100 • Indian MSP is effectively a

NYF in C/lb
2500
80 mechanism to pay the grower a
2000

1500
60 subsidy and reduce carry burden
1000
40 for mills
500 20
• Stocks are auctioned later in the
0
04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15
0
year by the CCI
MSP (Gujarat) Yearly Ave NYF
 Production and Planting History
Yield & Acreage
Indian Production and Planting History 700 14,000
14000 35000 600 12,000
500 10,000

‘000 Ha’s
Kg/Ha
12000 30000 400 8,000
300 6,000
200 4,000
10000 25000
100 2,000

'000 480lb bales

0 0
8000 20000

2000/2001
2001/2002
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
2013/2014
2014/2015
'000 Ha

6000 15000

Harvested Area Yield

4000 10000
MSP (Gujarat)
2000 5000
5000

4000
0 0 3000

2000

1000
Axis Title
0
Production/Bales Harvested Area/Ha
 Implication of a Seed Cotton Calc
Andhra
MSP Calculation Pradesh Gujarat
Support Price
Lint Outturn
40.5
33.0%
40.0 INR/kg of seed cotton
34.5%
Breakeven Relationship
Loss 2.0% 0.5%
Cotton Seed Outturn 65.0% 65.0%
Ginning costs 2.5 1.5 INR/kg of cotton seed
Gross Costs 43.0 41.5 INR/kg of seed cotton INR Domestic
Seed Price (estimate) 15.0 18.25 INR/kg of cotton seed appreciation Cotton Seed
Seed Revenue 9.75 11.86 INR/kg of seed cotton
vs. USD Prices
Net Costs 33.3 29.6 INR/kg of seed cotton
100:100 100:(40)
Break even lint value 100.8 85.9 INR/kg of lint
Ex Rate 61.7 61.7
Break even lint value 74.07 63.15 c/lb Ex Gin Gujarat will initially not trade at MSP
Break even lint value 77.8 66.4 c/lb CFR Far East as AP mills will import across state
lines to avoid having to compete with
CCI in their own state
 Indian Prices 14/15
MCX G5
16500

16000

15500 • Gujarat Market

trends towards MSP
15000
• Oil Prices rise as
INR/Bale

import taxes are

14500
hiked

14000

13500

13000
10/21/2014 10/28/2014 11/4/2014 11/11/2014 11/18/2014 11/25/2014 12/2/2014 12/9/2014 12/16/2014 12/23/2014 12/30/2014 1/6/2015 1/13/2015 1/20/2015 1/27/2015
 Indian Prices 14/15
MCX (dollarized) vs. NYF
NYF H5 MCX G5 c/lb

75

70

65
USC/lb

60

55

50
Indian Basis CFR Far East
14.00
12.00
10.00
USC/lb

8.00
6.00
4.00
2.00
0.00
Low Prices and Government Intervention in India

WHAT ROLE WILL CCI PLAY?

 08/09 Activity vs. 14/15 YTD
08/09 CCI activity
600

500

400
‘000 mt

300 08/09 Purchases

08/09 Sales
200

100

0
October November December January February March April May June July August September
14/15 CCI activity
600

500

400
‘000 mt

300 14/15 Purchases

14/15 Sales
200

100

0
October November December January February March April May June July August September
 08/09 Activity vs. 14/15 YTD
08/09 CCI activity (cumulative)
1600
1400
1200
1000
‘000 mt

800 08/09 Purchases

600 08/09 Sales

400
200
0
October November December January February March April May June July August September
14/15 CCI activity (cumulative)
1800
1600
1400
1200
‘000 mt

1000
14/15 Purchases
800
14/15 Sales
600
400
200
0
October November December January February March April May June July August September
 CCI Activity and Market Impact
• Procure 25% of total crop
• Will carry minimal stocks into new crop year
• Sales pace in 14/15 will be slower than in 08/09
• MSP is very unlikely to decline in the next few years
• Planted area likely to remain stable due to price inelasticity
• Production volatility will be a function of weather
Low Prices and Government Intervention in India

WHAT DRIVES INDIAN CONSUMPTION

GROWTH?
 Indian Consumption Patterns
Consumption/mt
5500

5225

4975
5000

4540
4474
4500
4300
'000 mt

4235

4050
3941
4000 3865

3636

3500

3000
2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
 China Substitution
China Yarn Imports
2,500

Country 2010-2014 Increase in yarn %age of

2,000
consumption exports to growth due to
increase China* China

1,500
000's MT

India 860k mt 554 64%

1,000 Vietnam 386 166 43%

Pakistan 152 293 192%

500
World 1,410 1,098 78%
exChina

- * Cotton Equivalent
2010 2011 2012 2013 20142014
extptd

Pakistan India Other

 Indian Growth
GDP Population
2 1.28

1.751 1.726 1.731 1.26

1.8
1.2521
1.591
1.24
1.6 1.2367

1.22 1.2212
1.4 1.288
1.2056
1.2
1.138 1.153
1.2 1.1901
US$ Trillion

1.18

Billion
1.1747
1
0.874
1.16 1.1591
0.765
0.8
1.14 1.1433

0.6 1.1271
1.12

0.4
1.1

0.2 1.08

0 1.06
2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013

World Bank 2013 US$ World Bank 2013

 Indian Consumption
• Long term modest upward trend underscored by GDP and
population growth
• 4 year windfall in textile sector from China substitution
amounts to nearly 5 percentage points of CAGR
• China yarn demand will be the biggest determinant of Indian
consumption growth (or decline) in the next few years
• Relative increases in consumption in cotton surplus states
(Gujarat. MP) at the expense of deficit states (Tamil Nadu)
Low Prices and Government Intervention in India

WILL INDIA REMAIN A SIGNIFICANT EXPORTER?

 Declining Exports
Production vs. Consumption
8000

7000

6000

5000
‘000 mt

4000 Production
Consumption
3000

2000

1000

0
2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Production Surplus vs. Exports
3000
2500
2000
1500
‘000 mt

Exportable Surplus
1000
Exports
500
0
2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
-500
-1000
 Export projections
• Consumption likely to grow faster than production, albeit with
a potential challenge from reduced yarn demand from China
• CCI activity provides domestic mills with a carry vehicle
reducing the normal incentives to export during harvest and
import in the off-season
• If MSP is relatively high compared to the World price, mills may
be incentivized to import even during the harvest – as
witnessed this year
Low Prices and Government Intervention in India

SUMMARY
 Summary
• MSP very unlikely to be reduced => Production should be
stable
• CCI are committed to destock before 15/16 season
• Consumption trend is positive but heavily reliant on China yarn
demand
• Export trend is downward from a high starting point. Will
almost certainly remain a significant exporter for next few
years
There’s no chance that the
iPhone is going to get any
significant market share. No
chance.
Steve Ballmer
Microsoft CEO, 2007