The future of Indian cotton supply and demand : implications for the U.S. cotton industry

During the last decade cotton production increased by only 8 percent, while consumption rose by 35 percent due to expansion in textile exports and consumption. The disparity between cotton production and consumption turned India from a net exporter to a net importer of cotton. India’s reemergence as a major cotton importer has occurred under the constraint of textile export quotas imposed by developed countries as part of the Multi-Fiber Arrangement (MFA). However, no attempt has been made to measure its effects on Indian and world fiber markets. The objective of this study was to develop a partial equilibrium structural econometric model of Indian fiber markets to measure the effects of MFA quota eliminations on the fiber markets. Next, the factors that increase competitiveness of U.S. cotton in the Indian market were identified. The partial equilibrium Indian fiber model was developed using a theoretically consistent framework and incorporated regional supply response, substitutability between cotton and man-made fibers, and appropriate linkage between cotton and textile sectors. Baseline projections were developed for supply, demand, and prices of cotton, man-made fibers, and textiles under a set of exogenous assumptions. The effects of MFA textile quota eliminations were introduced into the model by conducting three scenarios, i.e. increasing textile exports by 10, 20, and, 30 percent from the baseline level. The results suggest that on average, cotton imports rise by 4 to 8 percent annually, and the man-made fiber exports from India decline with the opening of textile markets in the developed countries. The higher domestic cotton prices encourage acreage expansion in cotton in all the three regions in India but not enough to meet rising mill demand under the scenarios of higher textile exports. The rise in cotton imports from India has little effect on world cotton prices. The analysis of the competitiveness of U.S. cotton shows that it is preferred by the Indian textile mills because of higher quality and consistency, still U.S. exporters need to develop strategies to counter the freight advantages and shorter delivery periods enjoyed by Egypt, Australia, Uzbekistan, and West Africa due to their geographical proximity to India.