Weak prices drive govt procurement, but storage capacity does not match up
After wheat and rice, a crisis is looming over the storage of cotton, as the government is undertaking massive procurements in many regions to prevent distress sales by farmers after the fiber prices crashed below the state-fixed benchmark rates despite a projected 5% drop in the countrys output.
The government has stacked up stocks of nearly 1.3 million bales in the third-largest producing state of Andhra Pradesh since the marketing year started on October 1, compared with the storage facility of around 1.7 million bales there, sources said. The Cotton Corporation of India (CCI), the governments biggest procurement arm, had procured a paltry 7,696 bales across the country during the entire 2011-12 marketing year. One bale equals 170 kg.
The situation may worsen as procurement is expected to touch a record five million bales in Andhra Pradesh, out of the states projected crop size of 7.2 million bales in the year that started on October 1, sources said. The CCI is procuring 40,000-50,000 bales a day in the state, which means the storage facility will be exhausted in the next few days.
Although prices in top two producers Gujarat and Maharashtra are somewhat holding up as of now, a slump in export demand has raised fears of massive procurement operations, and consequent storage crunch, unless cash-starved textile mills ability to stock up improves significantly. The CCI board will meet on Monday to review procurement and decide on the next course of action. The sources said the government is considering a sale plan to ease storage, although the decision would be a tough one to take.
If the government sells cotton from its reserves to textile mills at a discount, domestic prices may fall further. If it sells to traders at lower rates, mills will complain the government is forcing them to import while favouring exporters. So, it will be a difficult decision, said one of the sources.
The government may have to incur losses of more than R600 crore if stocks are offloaded to vacate space, he added. The CCI recently drew up a preliminary road map to procure a record nine million bales from farmers, entailing a cost of R16,470 crore, and also projected losses of R2,430 crore on such purchases.
Farm co-operative Nafed, too, had expressed willingness to procure three million bales, worth approximately Rs 5,500 crore.
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