Origin and history
The cotton plant has always thrived in the wild. Relevant literary references point to two distinct geographical origins of cultivated cotton, namely, Asia and pre-Columbian America. The first cotton fabric would date back to approximately as early as 3,200 BC, as revealed by fragments of cloth found at the Mohenjo-Daro archaeological site on the banks of the River Indus. From India, cotton textiles probably passed to Mesopotamia, where the trade started around 600 years BC.. The Arab conquests introduced the first cotton manufacturing facilities into Spain (Granada), Venice, and Milan. In England, the first cotton-spinning factory opened its doors in Manchester in 1641. This date marked the beginning of the cotton industry in Europe. The industrial revolution of eighteenth century Europe paved the way for the most far-reaching, influential transformation of cotton textile manufacturing. In this connection, the major technological innovations were the following:
KAY 1733 First flying shuttle. HARGREAVES 1764 First spinning wheel operating several spindles (spinning-Jenny). ARKWRIGHT 1767 Water-powered machine to draw out and turn the cotton thread (water-frame). WHITNEY 1793 Invention of the cotton gin. JACQUARD 1805 Automatic weaving loom endowed with a chain of cards with holes punched in. The loom could weave several patterns. Following these technological developments, those European countries that had managed to imitate the finesse of the Indian fabrics ceased their trade with India almost completely. Only English commerce with India, transacted by the East India Company, continued. However, England kept trading in raw cotton, while trade in processed forms was declining, especially after the demise of the East India Company in 1858. The second largest commercial outlet for Indian cotton was China. Cotton textile manufacturing resumed in India under the influence of Mahatma Gandhi.
In America, cotton was introduced with the arrival of European settlers familiar with cotton culture, who paved the way for the expansion of cotton plantations.
Cotton Production and Consumption
A declining trend of cotton’s share in textiles fibres since the 1970s compare to the chemical textiles (branched off oil) was stated- in 1960 the part of cotton was of 68.3% against 21,8% for chemical textiles and at the opposite the percentages were respectively of 39,7% and 57,7% in 2002. Cotton remains nevertheless by far the most important natural fibre of the 20th century. In a development context, cotton is crucially important for income and employment provided in its production and processing.
In 2007, cotton was grown in 90 countries. In 2006/07, the four main producing countries were China, India, the USA and Pakistan and accounted for approximately three quarters of world output. If we added Uzbekistan and Brasil, six countries would account for 83% of world cotton production. This concentration in cotton production, which appears to increase for several years, has to be put into perspective by considering the impact of domestic policy reforms in the largest cotton producing countries, as well as climatic and sanitary contingencies. For example, global output increased by 30% between the seasons 1983/84 and 1984/85, rising to 19.2 million tonnes up from 14.5 million tonnes. Most of the growth came from China.
Since the beginning of the 1940s, world cotton consumption has increased at an average annual growth rate of about 2% (roughly the same as production). Growth in the demand for cotton was comparatively higher in the 1950s and 1980s, with an average growth rate of 4,6% a year during the 1950s and 3% in the 1980s. Developing countries have absorbed much of global cotton output since the end of WWII. Their share in global consumption has become even more significant since the beginning of 2000s.
The main cotton producing economies also account for a large part of consumption. According to ICAC data, China, the United States, India, and Pakistan as a whole have accounted for approximately more than 55% of global cotton consumption over the period 1980 to 2008. Their overall consumption has risen considerably in volume.
Production of cotton in INDIA
India devotes more land to cotton than any other country and claimed 30.4% of the world’s total cotton acreage in 2008/09, compared with 20.5% for China and 9.9% for the United States (International Cotton Advisory Committee). Even so, India remains a distant second to China in cotton production, producing 17.8 million bales in 2008/09 to China’s 33.5 million bales (USDA). India’s cotton yield, at 523 kilograms per hectare (kg/ha), lags significantly behind both the Chinese yield of 1,331 kg/ha and the world average of 766 kg/ha (USDA estimates for 2008/09).
Another factor affecting Indian cotton yields and production is rainfall. About 80% of India’s annual rainfall comes from the monsoon, which typically occurs between June and September. Since only about 35% of India’s cotton acreage is irrigated, yields and production are highly susceptible to annual variation in rainfall. A dry year in 2008/09 contributed to the first year-to-year declines in yield and production since the introduction of GM seed – from 2007/08 to 2008/09, yield fell from 567 to 523 kg/ha and production from 24.6 to 22.5 million bales. This year, monsoon rainfall has been later and lighter than historical averages, delaying planting in some areas. If the current pattern continues, dry conditions could limit the size of the 2009/10 harvest.
IMPACT OF INDIAN COTTON IN 2009/10
General expectations are that Indian cotton will return to the world export market in 2009/10; the USDA currently estimates that India will ship 6.4 million bales. With returns for cotton harvests guaranteed by minimum support prices, Indian farmers have already increased their plantings by 16% in 2009/10, even though acreage is expected to decline in most cotton-producing countries as a result of weak global prices in 2008/09. However, India’s year-to-date rainfall is 25% below the long-term average, and drought is threatening Indian production. The USDA already projects a world production/consumption shortfall of 6.9 million bales (based on production of 105.9 million bales and consumption of 112.8 million bales). If continuing dry weather reduces Indian cotton production, the world production/consumption gap could grow further, contributing to upward pressure on cotton prices in 2009/10.
What is Demand??
The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time.
Factors for determining demand
Number of consumers
Price of related products
Income of consumer
Expected price effects
Tastes and Preferences
Qd – Quantity of demand
P – Price
I – Income of consumer
PR – Price of related Good
PE – Expected price effect
TP – Tastes & Preferences
Fig 1.1: An example graph of DEMAND CURVE
DETERMINENTS OF DEMAND
Differences in cotton prices may be attributable to a number of factors. Cotton prices vary, in particular, depending on the variety grown and the quality of the harvested cotton. For examples, ad hoc quotations are set for long-staple Egyptian cotton.
In addition, cotton-pricing mechanisms are affected by government support programmes, especially in the United States. Subsidisation regimes in several producing countries have added to the relative fragmentation of price formation for cotton.
Overall, fluctuations in cotton prices are determined by several factors, in particular: shifts in the level of demand and supply, which reflect changes in producing countries’ cotton policies.
* milkweed fibre
* other manmade fibres
PRICE AND AVAIBILITY OF SUBSTITUTES:
In India 40% of the population uses cotton utilities like bed mattresses and fabrics, while 10% uses silk in the form of sarees, kurtas and fancy articles, 14% uses wool for sweater, caps, shawls and other fabrics, 30% uses polyester and 6% milkweed fibre.
So, one of the reason for more share of cotton in India is plenty of production of cotton. Also the technology is growing through which artificial fibres are made mixed with the cotton.
Increase in the number of substitutes :
As the new substitutes of cotton are emerging with the technology and being introduced with the increasing trend of market as a whole and increase consumption level of cotton, need new alternatives are to be introduce such as RECRON, Polyester, silk, woollen materials like which are targeted to existing consumer of the market.
TYPE OF CROP MAJOR PRODUCING STATES HARVESTING TIME COST QUANTITY COTTON MAHARASHTRA, KARNATAKA, TAMILNADU, GUJRAT,ANDRA PRADESH, HARYANA, MADHYA PRADESH 4 TO 5 MONTHS FROM OCTOMBER TO MARCH RS. 21000 TO RS. 25000 1000 KGS SILK Karnataka, Andhra Pradesh, West Bengal, Tamil Nadu and Jammu & Kashmir 7 MONTHS JUNE TO JANAUARY RS. 1550000 TO RS. 1600000 1000 KGS WOOL Rajasthan, Punjab, Jammu & Kashmir, Karnataka, Gujarat, Uttar Pradesh Uttaranchal, Andhra Pradesh, Maharashtra, and Haryana. 9 MONTHS
JULY TO JANAUARY RS. 1250000 TO RS. 1800000 1000 KGS POLYSTER (MANMADE FIBRE) RAJASTHAN, GUJRAT, MAHARASHTRA, WEST BENGAL 15 DAYS RS. 64000 TO RS. 68000 1000 KGS MILK WEED FIBRE MAHARASHTRA, GUJRAT, KERALA, KARNATAKA, PUNJAB 2 MONTHS
FEBUARY & MARCH RS. 23000 TO RS. 27000 1000 KGS
LAW OF DEMAND
The relationship between price and the amount of a product people want to buy is called demand curve. This relationship is inverse because as price gets higher, people want less of a particular product. This inverse relationship is almost always found in studies of particular products, and it’s very widespread occurrence has given it a special name: the law of demand.
LAW OF DEMAND IN COTTON INDUSTRY
Quantity of Demand(X-axis)
Scale in lakh bales of 170 kgs Price(Y-axis)
Scale in Rs per Quintal 316.00 1729.83 290.30 1734.43 264.00 1778.67 204.17 1825.83 178.21 2041.33 169.21 2297.20 166.37 2505.94
Fig 1.2: Demand curve as per given values
The above graph shows that the quantity demanded and price are in inverse ratio, i.e. as price increase Quantity of demand decreases.
Shifting in Demand curve
Shift in demand curve refers to the change in demand due to change in factors other than price.
Types of shifts:
1. Upward shift
2. Downward shift
When demand for the same product increases at the same price, upward shift in the curve will take place.
This shift is due to increase in price of substitutes. So product manufacturers like auto mobile sectors and etc.., will buy much quantity of cotton. Finally it leads to upward shifting in demand curve.
Fig 1.3: Upward shift in Demand curve
When demand for a product reduces at the same price, downward shifting in the curve take place.
Suppose the price of the substitutes decreased than the price of cotton, then demand for cotton will decrease which leads to downward shift in the demand curve.
Fig 1.4: Downward shift in Demand curve
Price Elasticity of Demand:
Price elasticity of demand is defined as the percentage change in the quantity demanded resulting from a percentage change in price of the product, ceteris paribus.
The price elasticity can be calculated using the following formula-
Ep = Proportionate change in Quantity Demanded
Proportionate change in Price
Ep = Price Elasticity of Demand
Proportionate change in Quantity = ?Q/Q
Proportionate change in Price = ?P/P
Let Q1 = 204.17 and Q2= 290.03 (from Demand Curve data)
Let P1= 1825.83and P2= 1734.43(from Demand Curve data)
?Q/Q= (Q2-Q1)/Q2 = 0.2960
?P/P = (P2-P1)/P2 = -0.05269
Ep = MOD [5.61669]
Therefore, we can say that the Demand of Cotton is Relatively price Elastic.
Determinants of Price Elasticity:
For a normal good, more the number of substitutes more is the elasticity.
Since there are plenty of substitutes of cotton like Rayon, Nylon, Polyester and other synthetic substitutes, Cotton is relatively elastic.
Ceteris paribus, the higher the income spent on a good or service, the more elastic the demand for the good is.
In case of Cotton, if a person has high income, he will spend more on clothing, hence demand of cotton will increase and vice-versa.
So the elasticity of demand of cotton depends on income of the consumer.
3. Price of Production
For a normal good, higher the price of production higher is the price of the product; therefore lower the demand of the good.
In the case of cotton too, if the price of fertilizers, seeds and harvesting techniques is high or the crop is damaged due to natural causes like flood or drought, the prices of cotton will tend to go up, hence the demand will tend to come down.
Income Elasticity of Demand:
It measures the responsiveness of the quantity demanded of a good to the change in income of the people demanding the good.
It is calculated as the ratio of the proportionate change in quantity demanded to the percentage change in income.
Em = Proportionate change in Quantity Demanded
Proportionate change in Income
Em= Income Elasticity of Demand
Proportionate change in Quantity Demanded=?Q/Q
Proportionate change in Income= ?M/M
Since Cotton is a Normal Good its Em > 0.
DETERMINANTS OF INCOME ELASTICITY :
NATURE OF THE NEED GOODS COVER:
As mentioned above, for the developed countries it’s a necessity so income elasticity is relatively inelastic.
But for developing countries it’s a need and luxury both and elasticity is approx. unit 0.4 the income elasticity of cotton textile consumption was found to be 0.4, implying the income inelastic nature of textile consumption.
THE INITIAL LEVEL OF INCOME OF COUNTRY:
Depending upon the production of cotton and the development of the country, cotton becomes the important need and necessity and for developing countries the fabrics which are made from cotton.
If income of consumer having higher income reduces, he/she will not able to reduce their consumption in short period of time due to the marginal propensity to consume.
But if the income of a consumer increases, their standard of living also increases and so as the demand for the cotton, cotton fabrics and cotton products also increase in very less time span.
What is supply?
Supply may refer to the amount of some product which is available to customers as in confidence and supply.
Factors for determining SUPPLY
Price of inputs
Price of related products
Number of suppliers
QS – Quantity of supply
P – price
P I – Price of inputs
F – Future expectation
PR – Price of related Good
N – Number of suppliers
Fig 1.5: An example graph of SUPPLY CURVE
LAW OF SUPPLY
It states that quantity supplied is related to price. It is depicted as directly proportional to price: the higher the price of the product, the more the producer will supply, ceteris paribus.
LAW OF SUPPLY IN COTTON INDUSTRY
Quantity of Supply(X-axis)
Scale in lakh bales of 170kgs Price(Y-axis)
Scale in Rs per Quintal 196.51 1729.83 198.21 1734.43 205.20 1778.67 217.36 1825.83 276.17 2041.33 337.53 2297.20 369.00 2505.94
Fig 1.6: Supply curve as per given values
The above graph shows that the quantity supply and price are in directly proportional, i.e. as price increases Quantity of supply also increases.
Determinants of supply:
As stated earlier, price is positively related with quantity supplied for cotton. If there is an increase in price of cotton the farmers will be willing to yield more amount of cotton in the farm field.
Price of inputs:
The main source of raw material for production of cotton is cotton seeds, black soil land and fertilizers which are mainly found in the state of Tamilnadu, Maharashtra and Andhra Pradesh respectively. There is no scarcity in the supply of cotton and it was found to be good enough than other crops.
So, cotton being cash crop farmers are always ready produce it, however production of cotton seeds is followed by certain constraints such as kind of land amount of water requirement for it.
State of technology:
The cotton products are capital intensive and non-cotton products are labour intensive. Therefore, the technological changes vastly affects the cotton products where as the effect on non-cotton products seems to moderate. Due to the technological changes in the production of the cost reduction is noticed. So, supplier will be able to produce more earn more at same price ratio.
There are many government policies which also affects supply of cotton seeds and cotton such as exports of cotton to foreign countries and government price regulatory board to decide the price of cotton.
An export duty of 2,500 rupees ($56.47) a tonne has been imposed on all varieties of raw cotton with effect from April 9 2010.
With the export tax and a strengthening rupee, overseas sales would drop, is expected to drop.
It is expected that the country’s cotton exports might reach 8 million bales (1 bale=170 kg) in the year to September, more than double from a year ago, due to strong demand from China and Bangladesh .Hence the increase in export
Prices may not have a drastic effect on our exports.
Shifting in supply curve
Shift in supply curve refers to the change in supply due to change in factors other than price.
Types of shifts:
1. Upward shift
2. Downward shift
Upward shift or shift to left:
Upward shift take place when a supplier is able to supply less at the same price
This may be due to various reasons such as, increase in cost of inputs, increase in cost of production due to technology obsolesce, number of suppliers.
Suppose the number of suppliers has been decreased and there should be no change in price then they will supply less quantity at same price.
Fig 1.7: Upward shift in supply curve
Downward shift and shift to right:
Downward shift takes place when a supplier is able to supply more at the same price.
This is due to decrease in price of inputs, competition between suppliers and decrease in cost of cotton in future.
If the number of cotton industries is increased, there will be a large competition between industries. so they will supply large quantity at same price.
Fig 1.8: Downward shift in supply curve
Price Elasticity of Supply:
Percentage change in the quantity supplied resulting from 1-percent increase in price .This elasticity is usually positive because higher price gives producers an incentive to increase output.
The price elasticity can be calculated using the Formula:
Es = Proportionate change in quantity supplied
Proportionate Change in Price
Es= Price elasticity of supply
Proportionate change in quantity supplied=?Q/Q
Proportionate change in Price=?P/P
Q1=198.21 and Q2=217.36 (from the supply curve)
P1=1734.43 and P2=1825.83(from the supply curve)
Es=?Q/Q = 1.762
Hence it is Relatively Elastic.
This is the point of price that equates the quantity supplied to the quantity demanded.
Fig 1.9:Equilibrium point by supply and demand curves.
The above graph consists of two curves.
1. Demand curve
2. Supply curve
Both these curves meeting at a point at price =1835.83.Where price equates quantity of cotton supplied to the quantity of demand in the market.
EXPORTS AND GOVERNMENT PRICE SUPPORTS
With the substantial economic growth India has enjoyed over the past decade, Indian cotton consumption has risen 35%. While impressive, this growth has been outpaced by the 105% increase in production resulting from improved yields. India has thus enjoyed a surplus of production over consumption since 2003/04, contributing to its emergence as one of the world’s top exporters of raw cotton. Among the most important destinations for Indian cotton exports (based on value) are China (46.7%), Pakistan (20.5%), and Bangladesh (12.1%) (Indian Dept. of Commerce 2007/08 data).
Despite strong growth, an ongoing issue with Indian cotton exports is contamination. In the latest (2007) survey by the International Federation of Textile Manufacturers, the six most contaminated cottons tested were from India. Likely sources of contamination are hand-picking, where foreign matter (such as polypropylene strands from picking bags) may be accidentally introduced, and ginning, where seed coats may not be adequately removed, and wire or metal can break off machinery and remain embedded within the fibres.
The key factor affecting Indian exports in 2008/09, however, was not contamination, but government involvement in the pricing of cotton. In late summer 2008, the Indian government increased the guaranteed minimum support price for cotton by 30% to 50% (depending on quality). When cotton prices collapsed last fall, it became more profitable for Indian farmers to sell their cotton to the Cotton Corporation of India or India’s National Agricultural Marketing Federation than to sell it on the domestic or international market. Consequently, Indian cotton exports fell drastically (by 68%), from 7.0 million bales in 2007/08 to 2.0 million bales in 2008/09. Since accumulating almost 11 million bales, these organizations have sold most of their purchased cotton, primarily through bulk sales at a discount to the minimum support price.
TAXATION ON COTTON
Many persons are of the opinion that an export duty or its equivalent in the form of excise might be laid upon cotton without any detriment to the general interest of the trade of the country, while it would produce considerable revenue at the expense of the foreign consumers.
It is then an important economical and financial question to the people of India whether the peculiar advantages they have over all other cotton growing countries given them such a monopoly as to enable them to lay an export duty upon it, without any immediate or remote injury to themselves.There are several factors taken in to consideration before any tax related decisions are taken.
1] Universal demand for cotton
2] Restricted culture
3] Increase of production and advance of price
FUTURE EXPECTATION ON COTTON INDUSTRY:
The 7th Five Year Plan has huge consideration on agricultural growth that also includes cotton textile industry, resulting a prosperous future forecast for the textile industry in India. Indian cotton yarn manufacturers should rush forward for joint ventures and integrated plans for establishing processing and weaving facilities in home textiles and technical textiles in order to meet export target of $50bn, and a total textile production of $85bn by 2009-2010. Finally they achieved the target even there is a heavy drought in first three years.
Our expectation is that India will improve in quantity of exports and production of cotton down the line due to the massive growth in medical and automobile sectors in India.
REPORT ON INDIAN COTTON INDUSTRIES