Friday, December 23, 2011

Maharashtra's Cotton Farmers in Distress-Ashok Gulati-chairman-CACP

Maharashtra's cotton farmers in distress-Ashok Gulati-chairman-Commission for Agricultural Costs and Prices (CACP)
Maharashtra's cotton farmers are in distress and agitated. The steep fall in cotton prices has triggered this agitation. farmers are asking for a minimum support price (MSP) of Rs 6,000 per quintal on the plea that their cost of production is Rs 5,700 per quintal. The current MSP for long staple cotton is Rs 3,300 per quintal and for medium staple Rs 2,800 per quintal, as recommended by the Commission for Agricultural Costs and Prices (CACP).

Since we, at CACP, are the ones who recommend these prices, and our heart cries when farmers are in distress, I think it is only appropriate for us to respond to the price 'crisis' with facts and figures. Only a few years ago, Vidarbha was in the news due to unfortunate suicides by some cotton farmers. The Prime Minister and agriculture minister had to announce a special relief package for them. It may happen again this time too. But these are quick-fixes when cotton burns, and we will keep repeating them every once in three years or so. Wisdom lies in finding a sustainable solution to the problem. We need to first diagnose what lies at the root of this problem of Maharashtra's cotton woes.

The story of cotton during the last decade, at the all-India level, is a story of resounding success. The production of cotton, which was only 10 million bales in 2000-01, is likely to touch more than 36 million bales in 2011-12.

There is perhaps no other crop in Indian agriculture that has registered such a jump so quickly. It is well known that this magical transformation came from the introduction of Bt cotton. But what is not fully recognised is that lucrative exports of cotton also provided the necessary incentive to scale it up. In 2002-03, when Bt was introduced, India was a net importer of cotton. But in 2010-11, India exported more than 5 million bales worth more than $6 billion.

The international prices of cotton had more than doubled with the Cotlook A index increasing from 194.18 cents per kg in April 2010 to 506.34 cents per kg in March 2011. Domestic prices followed international prices through the export route, with S-6 variety of cotton prices increasing from Rs 28,277 per candy in April 2010 to Rs 59,700 per candy in March 2011 (1 candy is 355.6 kg of lint cotton; see accompanying graphic). So, cotton farmers in India made akilling with abnormal profits in 2010-11.

These high prices and profits in 2010-11 made farmers even more bullish and they produced a record crop of cotton in 2011-12. But the demand for cotton from China has slowed down (which is a ripple effect of dwindling demand in eurozone and the US). This led to sharply declining international prices (see graphic), adversely affecting domestic prices and a decline in the supernormal profits that cotton farmers reaped in 2010-11. To us, this is a self-correcting mechanism of a market economy, and cotton prices are coming back to their normal trend levels. The farmers are obviously not very happy, though in private, many of them admit that it was expected and they could not keep sitting on the peak of prices for long. But why Maharashtra farmers in particular are agitating so fiercely? Why don't we hear, for example, Gujarati cotton farmers agitating? There could be some element of politics in this, but here is the real economics behind the woes of Maharashtra cotton farmers.

Maharashtra has less than 5% cotton area irrigated compared to more than 50% in Gujarat. The yield of cotton is almost half in Maharashtra (332 kg/ha during the TE 2010-11) than in Gujarat (650 kg/ha for TE 2010-11). As a result, the projected cost of production for 2011-12 season is much higher in Maharashtra (Rs 2,960 per quintal) than, say, in Gujarat (Rs 2,216 per quintal), and even weighted average for India (Rs 2,528 per quintal) (see graphic). It is not surprising, therefore, that Maharashtra's cotton farmers have the lowest returns on their costs. For the medium staple cotton growers in Maharashtra, whose MSP is Rs 2,800 per quintal, the return from MSP over comprehensive cost (C2) is indeed negative (-5.4%), but it is positive 11.5% in case of long staple cotton, whose MSP is Rs 3,300 per quintal. And given the variance in the costs of individual farmers, I am sure many farmers in Maharashtra would be even making losses over cost C2. So, their grievance, to that extent, is genuine.
But look at Gujarati cotton farmer. He makes a margin of 26% in case of medium staple cotton and 49% in long staple cotton, as far as MSP and comprehensive costs (C2) are concerned. Rajasthan farmer makes even higher profits than Gujarati farmer. But these margins are over MSP. Farmers are selling their cotton at market prices, in the range of Rs 3,600-4,200 per quintal in different states for medium and long staple cottons, and these are still way above MSP. It needs to be noted that the C2 cost concept actually includes the imputed value of rent on their owned land and capital. The actual paid-out costs plus family labour (A2 + FL) are much lower, and the margins over this cost concept is much higher (see graphic), and this is what matters more.

Thus, the cost analysis gives a clear message that MSP of Rs 2,800/3,300 per quintal is covering the weighted average costs at the national level. And since CACP is entrusted to recommend MSP at the national level, not at state level, the situation of varying returns across states is but natural.

So what is the solution to Maharashtra's cotton woes? In the short run, again as a quick-fix, if the state government wants to announce a special relief package on perhectare basis, this is its prerogative. But a sustainable solution to this problem can be found only in large-scale investments in irrigation, may be through water harvesting structures (akin to what Gujarat did in Saurashtra region), improving agronomic practices through extension, and raising yields and cutting down costs. Water is critical and it needs large investments. The Centre should come forward for a mega programme (say, of Rs 30,000 crore or so) on water harvesting dovetailed with dry land farming of cotton, pulses, oilseeds, etc, in drought-prone areas not only of Maharashtra but also of other states. The solution of current cotton 'crisis' does not lie in hiking the MSP to Rs 6,000 per quintal, which can make cotton exports totally unviable, and high cost of cotton can then make domestic textile industry sick leading to large-scale unemployment.

(The author is chairman of the Commission for Agricultural Costs and Prices. Views are personal)

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