What’s Common Between Egyptian Cotton and Indian Pulses?

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In the recent past, Welspun India Ltd, has been in the news for all the wrong reasons.

The US retailer Target terminated its contract with the company for supplying bedsheets. Bloomberg puts the value of this business at $90 million. The stock price of Welspun has fallen by half over the last 10 days (between August 19 and August 29).

Welspun was supposed to supply bedsheets and pillowcases made of Egyptian cotton to Target. It seems that over the last two years, the company had been substituting Egyptian cotton with non-Egyptian cotton.

Fibres made from Egyptian cotton are longer than those made from regular cotton. This makes the fabric stronger. Further, bedsheets made from Egyptian cotton are also softer than those made from regular ones. For these qualities, in Egypt, cotton is also referred to as white gold.

Hence, given that Welspun was using other types of cotton, it wasn’t producing bedsheets that Target wanted it to. In the process, it lost the contract.

As to why Welspun did what it did, I really don’t know and that is not the reason behind writing this piece. What I am basically interested in is Egyptian cotton and the one common characteristic it shares with Indian pulses.

The production of Egyptian cotton has been falling over the years. Estimates made by United States Department of Agriculture – Foreign Agriculture Service (USDA—FAS) suggest that in the 1980s, Egypt grew cotton on an area of 5,00,000 hectares per year. This fell to 4,00,000 hectares per year in the 1990s. By the turn of the century this had fallen to 2,23,000 hectares of area. In 2015-2016, this fell to 1,00,000 hectares of area.

The USDA—FAS suggests that in 2016-2017, the area on which cotton has been planted in Egypt has fallen further to around 50,000 hectares. This is a huge fall of 50 per cent in just one year. The production is expected to fall to 1,50,000 bales from a production of 3,20,000 bales last year.

This is happening primarily because the cotton farmers are concerned “in terms of their ability to market the crop, especially with the lack of strong commitment from the government that it will buy the crop from farmers.” Over and above this, “Egypt’s industry is relying less on the domestic crop which is comprised mostly of extra-long staple and long staple varieties, while users’ needs have shifted to medium and short staple varieties.”

Hence, while there is a demand for long staple Egyptian cotton internationally and there is a premium for it, that doesn’t seem to be the case within the country. This along with the fact that the Egyptian government hasn’t shown a strong commitment of buying cotton, has led to farmers planting less and less of cotton. Instead of growing cotton, the Egyptian farmers seem to be growing rice. The area under cultivation has jumped from 4,62,000 hectares last year to 6,50,000 hectares this year.

In fact, in India, pulses have been going through a similar phenomenon. While, the total production of pulses hasn’t fallen as dramatically as the production of cotton has fallen in Egypt, it hasn’t gone up either.

Take a look at the following chart. This shows the total production of pulses over the last 30 years.

As is obvious, the total production of pulses has more or less been flat over the last thirty years. In 1986-1987, India produced 16.32 million tonnes of pulses. In 2015-2016, the total production was at 17.06 million tonnes, as per the third advanced estimate published by the ministry of agriculture.

What does this tell us? It tells us that production of pulses has more or less been flat over the last three decades, even though the demand for it has gone up. How do we know that? Take a look at the following chart. It shows the total quantity of pulses that India has imported ever year, since 1990-1991.

In 2015-2016, the import of pulses peaked at 5.80 million tonnes. The increased import of pulses shows that the demand for pulses has gone up over the years, as the income has gone up and people have started eating better, leading to a demand for protein based food products. Pulses are an excellent source of proteins for vegetarians.

In fact, it is safe to say that the real demand for pulses is higher than the total production plus import number, given that even after increased imports, the price of different kind of pulses has continued to remain strong. Hence, many people are either not able to afford pulses or have had to simply cut down on its consumption.

A further increase in imports is not the solution given that India is the largest producer, consumer and importer of pulses in the world. The interesting thing is that despite rising prices, over the last few years, the production of pulses hasn’t gone up. This is primarily because the government up until now had been procuring only rice and wheat directly from farmers. It hasn’t been serious about procuring pulses like the Egyptian government hasn’t been serious about procuring cotton.

And given this ready availability of a buyer, the farmers find it safe to grow rice and wheat. This has led to the production of rice and wheat going up at a steady rate. In fact, now we have reached a stage where on the whole we are overproducing rice and wheat and not producing as much pulses and oilseeds as are required.

Along with the farmers preferring to grow rice and wheat what has not helped is the fact that the last two years’ rains have failed. Given that only 16.1 per cent of area under production of pulses is irrigated (2011-2012 data), the total production took a beating.

This year the government has started to buy pulses (like it buys rice and wheat) to build a buffer stock. The idea is to encourage the farmers to grow pulses given that the government is a ready buyer. It remains to be seen whether the procurement machinery of the government can gear up to the challenge of procuring pulses.

As economists Ashok Gulati and Shweta Saini write in The Indian Express: “The existing procurement machinery is more attuned to procuring rice and wheat than pulses — they require an operationally different treatment. This necessitates gearing up the system accordingly.”

Also, on August 26, 2016, the government ordered imports of 90,000 tonnes of pulses in order to add to the buffer stock. Following this procurement, the buffer stock of pulses has jumped to 1.76 lakh tonnes.

The other encouraging piece of information is that area on which kharif pulses (arhar, moong and urad) have been sown this year has gone up dramatically. As on August 26, 2016, the total area on which pulses had been sown stood at 13.94 million hectares, up by around 34.3 per cent from last year.

This basically means that the prices of the kharif pulses will come down in the months to come as the increased production starts to hit the market. At the same time the government needs to step up procurement in order to ensure that a bumper crop doesn’t lead to a dramatic fall in prices. If that turns out to be the case, then enough farmers will not be encouraged to sow pulses again next year and we will end up with the same problem.

This is important given that even the bumper crop won’t be able to cover for the 5.80 million tonnes of pulses that were imported in 2015-2016. Also, the basic problem of Indian agriculture i.e. well-functioning private markets through which farmers can hope to make some money and not be taken for a ride by the intermediaries, continues to remain.

The column originally appeared in Vivek Kaul’s Diary on August 30, 2016

 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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