Cotton ginner face tough time with falling prices and shrinking profit margins

Cotton ginners are in a fix as export demand is less as major buyers like China have not turned up this time. This is hurting realization from processed cotton, thereby reducing profit margins for ginners, said Arvind Patel, Vice-President of Saurashtra Ginners’ Association (SGA), one of the largest clusters of the cotton ginning industry in the country.

Out of over 4,300 ginning units, about 1,300 are spread across Gujarat, with major concentration in Saurashtra and North Gujarat. About half of them are shut because of the economic unviability. They are looking to shift to other businesses, even as the cotton arrivals are likely to begin soon, added Patel.

As per industry estimates, it requires about 1,000 kg of raw cotton to make one candy (356 kg) of cotton. The cost economics puts the total cost to make a candy at ₹42,000-43,000, including processing cost, while the price stands at ₹32,000 per candy.

Cotton prices continued to slide from ₹32,800 to ₹32,000 per candy (356 kg) during the November.

Raw cotton comprises of about 34 percent of cotton, 63 percent of cotton seed and about 3 percent wastage. Seed fetches anywhere between ₹390-410 per 20 kg. This puts the overall realization for a ginner at around ₹44,000 per candy, including cotton and seed. This leaves ginners with a thin profit margin.

Cotton ginning units have a tough time ahead with shrinking margins, amid falling cotton prices and costly finance from lenders. Ginners have raised concerns about the high cost of finance, which has left a large number of units shut.

Dhiren Sheth, President, Cotton Association of India said that the business model of ginners is such that price fluctuations are part of it. In absence of Chinese demand, there is a pressure on prices. However, a small quantity continues to be exported to Pakistan, Bangladesh and Vietnam.

According to Bhagwan Bansal, President, Punjab Cotton Ginners’ Association, there doesn’t seem to be good days for ginners. In addition to the lower demand, a high interest rate on term loans taken by unit owners is also hurting. Most lenders charge in the range of 13-14 percent. Most of the units in Punjab and Haryana and also in other parts of the country would require an average ₹3-4 crore as working capital to process the cotton.

The issue faced by Ginners will be taken up with the Union Finance Minister and the Reserve Bank of India (RBI), seeking financial support.