Demonetization move has caused delay in the exports of 1 million bales of cotton from top producer India. The supply crunch has driven up prices in India to levels higher than in the global market and could force buyers to switch to other producers like the United States, Brazil and African countries.
Expecting a bumper crop of 35 million bales, Indian traders had contracted 2 million bales for exports to China, Vietnam, Bangladesh and Pakistan for shipments in November to January. But traders have managed to ship only around 300,000 bales and nearly 1 million bales that were due to ship in November and December are getting delayed.
It could also curb India's total exports in the 2016/17 year marketing year that started on October 1.
Earlier this month, Prime Minister Narendra Modi scrapped 500 rupee and 1,000 rupee bills to crack down on corruption. But the move disrupted trading of farm commodities like cotton and soybean as most farmers prefer payments in cash.
Chirag Patel, chief executive officer of Indian exporter Jaydeep Cotton Fibers said that supplies are very limited in the market. Farmers are not selling cotton right now as they need payments in cash and it is not available.
Pradeep Jain, a ginner based in Jalgaon in the western state of Maharashtra said that November remains a peak supply month but now supplies have stopped due to the cash crunch. They are ready to give farmers cheque, but the farmers insist on cash.
New York cotton futures last week touched a high of 72.75 cents per pound, the loftiest since August. They have risen about 5 percent over the past fortnight, versus a 10 percent gain in Indian prices.
Jaydeep Cotton's Patel said that the surge in local prices is also making signing new export deals difficult for India as overseas prices are lower than local prices. Rebecca Pandolph, statistician of International Cotton Advisory Committee said that the disruption in exports will have an impact on global prices as it reduces the overall supply.The overall effect will depend on the extent of time period of the problem.
India's inability to ship promptly could force buyers to switch to other suppliers like Brazil and the United States. Keith Brown, principal at cotton brokers Keith Brown and Co in Moultrie, Georgia said that may be one reason why US cotton have been going higher at harvest time.
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