Are we at peak cotton?

Indian cotton could touch Rs 2.75 lakh per tonne by October, says the textiles ministry. Wow! That's some number. It makes cotton more precious than aluminum, crude oil, iron ore, and ten times more valuable than sugar. No other field crop in India comes even close. What this also means is that the new 2011-12 could open at this fantastic price that translates into Rs 1 lakh per candy.

The textile ministry's latest calculations are straight forward. Going by the snail's pace of current mandi arrivals, it pegs the season's output at 31 million bales. Hectic capacity expansion means local mills can now process up to 28 million bales. As 5.5 million bales have been exported, we will eat up this year's entire output, plus half the bales left unsold from last year. By October 1, India would have 2.4 million bales left. Or enough to last mills just one month.

What traders in New York are willing to pay acts as a natural cap on local Indian markets because no one would be foolish enough to stock cotton at a price higher than that. On ICE futures, New York, traders are paying Rs 68,000 per candy for delivery in March. And they are willing to pay that much right up to July. Prices in our own mandis, therefore, crossed Rs 64,000. Yet a tipping point is close.

The proposal to export another 2 million bales is not yet dead. The commerce ministry says there is political willingness to let this quantity go. But it is wary. Textiles minister Dayanidhi Maran shot off stormy letters last week to Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee detailing the irregularities in cotton and yarn quota allocation. Commerce Minister Anand Sharma has been conspicuous by his silence.

Faced with this onslaught, the commerce ministry is now waiting for a direct nod from the FM before it raises the cap on exports. Caught in this dogfight, everything depends on the FM. If he pays heed to Maran's anxiety over India's fibre security, no more exports. It will then take until October for domestic demand to gradually push prices to Rs 1 lakh. If Anand Sharma wins the day for exporters, cotton could do that within weeks.

Are we are seeing peak cotton prices? Or can the world afford to spend more on cotton? That's the big question on which hinges all future investment. The answer lies in the next season. Cotton is planted in summer. After receiving once-in-two-lifetimes prices, farmers across the world should be stampeding to plant it. Only they may not.

China Cotton Association says only 10% more area will be sown for 2011-12. China is the world's biggest producer and consumer. USA's National Cotton Council says its survey shows plantings will jump maximum 14%. American farmers are equally attracted to corn and soyabeans. Both crops are at a three-year high, despite this year's largest harvest in history.

In India, the world's second largest producer and consumer, acreage may drop due to seed shortage. Seed companies say supply of BT cotton seed may be at least 10% short of demand after bad weather affected production. This translates into a million hectares less planted and 3 million bales less output.

That's a conservative estimate. Because when seed of such a precious commodity is scarce, the entire marketing chain is affected. Since cotton seed prices are government-controlled, official premium is impossible. The entire business will shift to the grey market where dealers will make merry. Worse, counterfeit seed will flood the market, affecting yields even in the acres planted. Forget exports, next year Indian mills will be indulging in hand-to-hand combat to feed their new spindles.

While global production is limited by stiff competition for acres between crops, demand continues to spiral. Prosperous families are spending on clothes, furnishings and towels. Global demand is up 40% in seven years. In China alone, per capita apparel spending tripled over the last 15 years. There is no way a crop can cope with such performance pressure. The conclusion is obvious.

Everyone was blindsided this season. Cotton was the worst hit from the 2009 global recession. No one expected recovery in 2010 to be so rapid or so relentless. But it taught an important lesson. Cotton prices have left behind the past. There has been a structural shift in how the world views fibres. Peak cotton is a long way away.