Looking for a bale-out

As against Rs 25,662 per quintal last year,the production cost this year has gone up to Rs 36,359 for farmers who till their own land a 42 per cent rise. In case of those who till land on hire,the increase in production cost works out to 36 per cent,the study done by economists A R Reddy and Anuradha Narala has found out.

The current open market rate for cotton is Rs 4,000-Rs 4,500 per quintal. But the MSP that had apparently become irrelevant due to good open market prices over the past three years,suddenly seems relevant given the increased production costs.

N P Hirani of the NCP,who is the chairman,Maharashtra State Cotton-growers Co-operative Marketing Federation,a cotton purchase body of the state government,recently said that according to to the Federations study,the production cost has gone up to Rs 5,700 per quintal.

NCP leader Ajit Pawar had said at Yavatmal recently that the MSP be hiked to Rs 6,000. All other parties are making similar demands while resorting to road bloackades and jail bharo.

The increase in production cost is largely attributed to a steep rise in labour and fertiliser costs this year (see table). Reddy explains: It is being caused by labour shortage that is basically attributed to MNREGA. We were told by farmers that the labour cost has gone up also due to the huge price that farmers fetched last year. Farmers across the country had earned up to a record Rs 6,000 last year.

Normally,the MSP is fixed on the basis of average cost of production in the country plus a reasonable profit margin. But since productivity and cost of production varies from region to region and from state to state,the benefits could be marginal in areas like Vidarbha.

Thus,with the current MSP,the Vidarbha cotton farmer ends up suffering losses,which would prove crippling for small and marginal farmers.

The crisis further worsens when there are natural calamities like drought and excess or erratic rains. Many farm activists have claimed that cotton production has been hit this year due to erratic rains,a claim refuted by state officials.

A farmer with two acres of land will ideally produce up to 10 quintals with Bt cotton. And under the circumstances,he would lose Rs 7,000 per annum at the MSP rate. That the open market prices save them from that blow,is a fact, said an official without wanting to be quoted.

While some say its a case for letting the open market play out there for farmers to benefit,others feel this year has again brought to fore the need for government cushioning the fluctuations. Says farm activist Vijay Jawandhia: the situation in Vidarbha is really bad. Input costs have gone up and prices have gone down. It is an eye-opener for those who advocate free market.

How cotton prices play out for mills

Secretary-General,Confederation of Indian Textile Industries (CITI),D K Nair said: Cotton farmers and textile industry are highly inter-dependent and one cannot prosper at the cost of the other. Last year,cotton prices doubled in six months,from October to March,and returned to the original level in less than a month,in April. The industry normally stocks cotton for four-six months,depending upon the holding power of the mills. There,of course,are many who live hand-to-mouth for problems of funding.

Most mills,which had high-cost cotton for 4-6 months consumption in April,ended up losing huge amounts of money in devaluation of cotton stocks. Measured or gradual increase or decrease doesnt affect the mills significantly. But the roller-coaster effect of huge fluctuations can be lethal.

Last fiscal saw a huge increase in cotton prices. But mills did not suffer much because prices of textile products also increased,in spite of some irrational actions of government on cotton yarn exports. But when prices nosedived in April and continued low for several months,mills lost heavily. Out of 287 mills whose results came in BSE,122 made net loss in Q1 of this year (April-June 2011) and 166 had poorer results compared to Q1 of last year.

The 287,incidentally,covers spinning mills,weaving and processing units,garment firms and home textile producers – that is,the entire value chain.