The economics of cotton cultivation in India : supply and demand for 1980-90

SWP618 1984 The Economics of Cotton Cultivation in India Supply and Demand for 1980-90 Ton A. Hitchings WORLD BANK STAFF WORKING PAPERS Number 618 HD 9086 . I45 H57 1984 c.2 SLCO1 8234   WORLD BANK STAFF WORKING PAPERS Number 618 The Economics of Cotton Cultivation in India Supply and Demand for 1980-90 Jon A. Hitchings g t t c 98814 The World Bank Washington, D.C., U.S.A.  Copyright (D 1984 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N W. Washington, D C. 20433, U S.A First printing February 1984 All rights reserved Manufactured in the United States of America This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The views and interpretations in this document are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. Any maps used have been prepared solely for the convenience of the readers; the denominations used and the boundaries shown do not imply, on the part of the World Bank and its affiliates, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries The full range of World Bank publications is described in the Catalog of World Bank Publications, the continuing research program of the Bank is outlined in World Bank Researchi Program Abstracts of Current Studies Both booklets are updated annually, the most recent edition of each is available without charge from the Publications Sales Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'lena, 75116 Pans, France. Jon A Hitchings, now an investment officer in the Investment Department of the World Bank, was an economist in the Country Programs Department when the paper was written. Library of Congress Cataloging in Publication Data Hitchings, Jon A. The economics of cotton cultivation in India. (World Bank staff working papers ; no. 618) Bibliography: p. 1. Cotton trade--India. 2. India--Commerce. I. Title. II. Series. HD9086.145H57 1984 338.1'7351'0954 83-27377 ISBN 0-8213-0322-8  ABSTRACT This paper is part of continuing work on the Long Run Prospects of Indian Agriculture which places particular emphasis on supply and demand projections for principal agricultural commodities. The first articles in this series, covering foodgrains, vegetable oils, and sugar, appeared as World Bank Staff Working Paper 500 (October, 1981). The present paper extends the coverage to cotton which ranks third in area and fourth in value of output. Cotton is also the predominant input in the textile industry which is the largest industrial employer. The paper analyzes the contribu- tion of irrigation to the production growth rate, and the returns to cotton cultivation through time, in a variety of areas and utilizing a number of production technologies. The potential for increasing profitability through improved varieties and cultivation practices is addressed. The effects of trade policy on output prices is discussed using nominal protection coeffi- cients. The paper concludes by building a simultaneous supply/demand model for cotton and textiles which incorporates trade in textiles and cotton lint and the behavior of textile mills. The model is used for five and ten year projections given a range of policy alternatives.  EXTRACTO Este documento forma parte del trabajo continuo sobre las perspectivas a largo plazo de la agricultura de la India, en el que se concede especial importancia a las proyecciones de la oferta y la demanda de los principales productos basicos agricolas. Los primeros articulos de esta serie, que versaron sobre los cereales alimentarios, los aceites vegetales y el azuicar, aparecieron como el No. 500 (octubre de 1981) de la Serie de Documentos de Trabajo del Personal del Banco Mundial. Con el presente documento se amplia el alcance de esa colecci6n para incluir el algod6n, cultivo que ocupa el tercer lugar en terminos de superficie y el cuarto en valor de la producci6n. El algod6n es ademas el insumo predominante en la industria textil, que a su vez es el empleador industrial mas importante. En el documento se analizan la contribuci6n del riego a la tasa de crecimiento de la producci6n y a los rendimientos del cultivo del algod6n a traves del tiempo en una variedad de zonas y mediante el uso de diversas tecnologias de producci6n. Se examina tambien la posibilidad de aumentar la rentabilidad mediante el uso de variedades y prActicas de cultivo mejoradas. Asimismo, se exponen los efectos de la politica comercial sobre los precios de los productos utilizando coeficientes nominales de protecci6n. El documento finaliza con la elaboraci6n de un modelo simultaneo de oferta y demanda para el algod6n y los productos de la industria textil en que se incorpora el comercio de textiles y borra de algod6n y el comportamiento de las fAbricas de tejidos. El modelo se usa para proyecciones de cinco y diez afios con una variedad dada de opciones de politica. Cette etude s'inscrit dans le cadre de travaux continus sur les pers- pectives A long terme de l'agriculture indienne, qui accordent une attention particuliere aux projections de l'offre et de la demande des principaux produits agricoles. Les premiers articles de cette serie, qui portaient sur les cereales alimentaires, les huiles vegetales et le sucre, ont ete publies comme Document de travail No 500 des services de la Banque mondiale (octobre 1981). La pre- sente etude porte sur le coton, qui vient au troisieme rang pour la superficie cultivee et au quatrieme pour la valeur de sa production. Le coton est egale- ment l'element predominant de l'industrie textile, qui est elle-mame le plus gros employeur du secteur industriel. L'auteur analyse l'influence de l'irriga- tion sur le taux de croissance de la production cotonniere, et la rentabilite de la culture du coton au cours de ces dernieres annees, dans diverses regions et en fonction d'un certain nombre de techniques de production. Il examine les possibilites d'accroitre la rentabilite en utilisant des meilleures varietes et meilleures methodes de culture. Il etudie les effets de la politique commer- ciale sur les prix de la production en utilisant des coefficients de protection theorique. L'etude se termine par l1'tablissement d'un modele simultane de l'offre et de la demande pour le coton et les textiles, qui tient compte du com- merce des textiles et du coton-fibre ainsi que du comportement des usines tex- tiles. Ce modele est utilise pour etablir, a partir d'un eventail d'options, des projections sur cinq et dix ans.  TABLE OF CONTENTS Page I. Overview and Conclusions ......... .................. ........... 1 II. Technical Background on Cotton Varieties, Processing and Products ....................................... 5 III. Sources of Production Growth ...... ........................ 7 IV. Returns from Cotton Cultivation ...... ......................... 18 A. Comparisons Through Time ............... .. ............ 18 B. Comparisons Between States ......... .................. 26 V. Agronanic Scope for Increasing Profitability .................. 30 A. Genetic Characteristics ...... ........................ 30 B. Cultivation Practices ....... ......................... 31 C. Pest Management ...................................... 33 D. Improved Seed ........................................ 35 E. Varietal Comparisons of Profitability ............. ... 36 F. Summary .............................................. 43 VI. Price Implications of Trade Policy ..... ....................... 45 VII. A Model of Supply and Demand for Cotton and Cotton Textiles with Projections and Policy Alternatives ...........--.. 55 A. The Model ..................... ....................... 55 B. Elasticities ....... .................................. 61 C. Projection Results for 1990/91 ........ .. ............. 65 D. Comparison of Projections .......... .. ............... 69 VIII. Production Outlook ............................................ 75 APPENDICES A. Projections for 1985/86 Given Alternative Hypotheses . .81 B. The Projection Model ..82 C. Time-Series Data ................................................. 83  - ii - LIST OF TABLES Table 1 Continuous Growth Rates for Cotton Area, Yield, and Production Table 2 Growth Rates in Cotton Yield, Irrigation, and Area by State: 1960/61 - 1978/79 Table 3 The Components of the Yield Growth Rate for Cotton Table 4 Cotton Production, Area, Yield, and Share of Irrigated and Rainfed Area Table 5 Central Agricultural Price Commission Returns from Cotton Cultivation in Punjab Table 6 State Agricultural Price Commission Cell Returns from Cotton Cultivation in Maharashtra Table 7 Comparisons of Cost of Cultivation Data from Various Sources for Maharashtra Table 8 Returns from Cotton Cultivation Using Trend Yields: Comparison Between States Table 9 Sources of Variation in Production Costs Table 10 Returns from Cotton Cultivation in Gujarat: Comparisons Between Irrigated and Rainfed Conditions Table 11 Varietal Comparisons of Returns from Cotton Cultivation in Maharashtra Table 12 Returns from Cotton Cultivation in Haryana and Comparisons with Appraisal Reports Table 13 Present and Projected Output/Input Ratios for Cotton in World Bank Appraisal Reports Table 14 Derivation of Import Parity Farmgate Prices for Seed Cotton Table 15 Nominal Protection Coefficients for Seed Cotton Table 16 ,Comparisons of Nominal Protection Coefficients in Various Appraisals and the-Present Study  - iii. - Table 17 Definitions, Means, and Growth Rates of Model Variables Table 18 Model Elasticities Table 19 Expenditure Elasticities of Cotton Cloth Demanded Table 20 Projection Results Given Alternative Hypotheses Table 21 Per Capita Woven Cloth Availability Table 22 Comparisons of Supply and Demand Projections  - iv - LIST OF FIGURES Figure 1 Regression of Yield Growth Rates Against Trend in Irrigated Proportion Figure 2 Regression of Yield Growth Rates Against Trend in Irrigated Proportion Weighted by States' Production in 1978/79 Figure 3 Deflated Wholesale Price Indices for World Cotton, Indian Cotton and Indian Foodgrains Figure 4 Trends in Price and Output/Input Ratios in Punjab Figure 5 Trends in Yield and Output/Input Ratios in Maharashtra  SECTION I OVERVIEW AND CONCLUSIONS Introduction. No crop in India can compete with cotton's poten- tial for value-added in processing. Raw cotton is ginned, the seeds are crushed for oil, the oil is refined for consumption, the lint is pressed into bales, and the bales are spun into various yarns, which are dyed and woven (sometimes with viscose and synthetic fibers) into cloth and fabrics. These in turn are made into countless types of finished goods. Cotton is the overwhelmingly dominant raw material of the textile industry, which is the largest employer in the industrial sector. 1/ Part of the complexity of studying cotton derives from the fact that it-is traded and marketed at all stages of processing. The importance of cotton as a raw industrial input, and its tradability in multiple forms, create involved, highly visible, and strongly-debated policy issues affecting the welfare of producers, processors, their employees, and final consumers. The agronomy of cotton is also complex. The value of a crop, for example, is a function of the oil content of the seeds, the ginning per- centage, the spinning counts of the lint, and the length and strength of the fibers. Numerous varieties are grown under rainfed and irrigated conditions occupying altogether about 5% of the total cultivated area in India, and distributed over nine principal states. India's cotton area is by far the largest in the world, while its production ranks fourth, and its yields are the lowest 2/ at 162 kg lint per hectare. 3/ Although India has achieved approximate self-sufficiency in cotton lint and remains a significant net textile exporter, over the last 20 years the per capita consumption of cotton cloth has been steadily declining, the consumption of all cloth has stagnated in per capita terms, and there has been vir- tually no trend in cultivated area. This paper is oriented to issues of cotton production. It examines the sources of trends in production; the profitability of cul- tivation broken down by varieties, states, years, and growing conditions; the agronomic constraints to profitability and research efforts to sur- mount them. But the paper has a second focus on the supply and demand balance, export potential, and the price implications of trade policy. In this arena, a simultaneous model is constructed of production, mill con- sumption of lint, and private consumption of textiles, which incorporates 1/ Over 80% of the cloth in India is cotton, including the cotton com- ponent of blended fibers. 2/ Excluding Uganda. 3/ 1979/80 crop year. The statement holds for other years as well.  -2- trade balances of lint and textiles. The model is used to project sets of scenarios over the next decade. The study also draws on many of the World Bank appraisal reports of cotton or cotton-related projects in India to examine the output/input ratios and economic prices that have underpinned loans for cotton development. Organization. The paper begins with a brief background section which describes characteristics of leading varieties, physical deter- minants of price, processing parameters, seed crushing and oil extraction rates, and the like. The role of irrigation in production is addressed in the next section, primarily by regressing yield growth rates in cot- ton-growing states against changes in irrigated proportions. The aggregate yield growth rate can thereby be decomposed into an irrigation component within states, and irrigation-independent component, and shifts in area between states affecting the composition of the total cotton area. The section presents summary data on production and changes in cotton's share of irrigated and rainfed cultivated area by state. The returns from cotton cultivation are compared through time and between states in Section IV. Trends in domestic and world cotton prices are discussed in this context. The agronomic scope for increasing profitability is examined at length with particular attention to the development and distribution of improved varieties, cultivation practices, and pest management in Section V. Section VI derives careful estimates of import parity prices at farmgate for several years and two cotton varieties. These economic prices are compared with prices actually received to measure the extent of protection or taxation farmers undergo through trade policies and economic distortions. The ratios (of prices received by farmers divided by economic prices) are matched against appraisal estimates to examine the discrepancy between financial and economic returns. Section VII estimates the elasticities of a simultaneous supply/demand model of cotton lint and textiles. The mDdel is used to project a number of scenarios for production, consumption of lint and textiles, trade balances, and prices over the next decade. A selection of cases is used for comparison with other forecasts. The paper closes with a discussion of the production outlook and a summary of salient points that were raised. The appendices provide projections for the intermediate period 1985/86, the reduced form of the model, and the time-series data that were utilized. Conclusions. India is unlikely to become a significant net exporter of cotton lint during the next decade. A positive export balance was achieved in 1977 due to increases in production and a trend of declin- ing consumption per capita. Gains in production may be attributed almost wholly to rising yields which in turn have depended on higher proportions  -3- of cotton area being placed under irrigation. There has been no sig- nificant total area trend over the last twenty years, and the cotton area planted under rainfed conditions has contracted. About three-quarters of the 2.0 percent growth rate for yields is related to expanded irrigation, particularly in Punjab, Gujarat, Rajasthan, Karnataka, Tamil Nadu and Andhra Pradesh. However, cotton's share of the total irrigated area for all crops has remained constant at around 3.5 percent. It appears that increased production will require further investment in irrigation. Genetic improvements have not resulted in varieties which are causing cotton to significantly displace other crops on rainfed or irrigated land. Factors affecting the profitability of cotton are perhaps more numerous and complex than those affecting grains. Some important breakthroughs have yet to be made. Research continues with the objectives of raising the value of the output, through elevating ginning percentages, seed oil content, and staple length; boosting yields; and minimizing production costs, particularly expenditures for pest management. The potential of genetic improvements and altered cultivation practices are less fully realized for cotton than for grains. Existing improved and hybrid varieties tend to have much higher production costs (sometimes double), higher net returns, and a lower ratio of value of output to value of inputs. The higher production costs of specialized varieties make them appropriate for farmers who are financially able to assume greater risks, or for intensive cultivation on smaller plots. The per capita consumption of cotton textiles has declined from about 14.5 square meters in 1960 to 12.25 presently, despite a drop in real prices. The expenditure elasticity for textiles, estimated from cross-sectional data, indicates a strong willingness to spend incremental income on clothing and textiles. This does not translate proportionately into greater physical consumption (e.g., kilos per capita) due to quality substitution. Reversing the trend and raising per capita consumption of cotton textiles one square meter by 1990 (including the cotton component of blended fabrics) would require net lint imports amounting to a quarter million tons by that year, or large reductions in textile exports, or a rapid drop in real foodgrain prices which would stimulate cotton produc- tion. This scenario assumes that the present pace of extending irrigation to new territory is maintained. The proportion of irrigated to total cotton area would then reach 46 percent by the end of the decade starting from 28 percent presently. Over the next ten years, a ten percent increase in cotton textile exports and moderate cotton lint exports reaching 135 thousand tons (eight percent of production) would be consistent with stabilized per capita cotton consumption, expanded irrigation at the current rate, and declining real foodgrain prices. Foodgrain prices are a critical parameter owing to the large cross-price elasticity for cotton production. Projecting from the most probable set of assumptions, India would remain in balance with  -4- respect to trade in cotton lint, i.e., net imports or exports would be marginal, while cotton textile exports would continue at arcund 1.1 bil- lion square meters. Under this scenario, most increases in production will be required to keep up with population growth with per capita con- sumption assumed to remain at around present levels. Although trade in lint is expected to be in equilibrium, nominal protection coefficients indicate that cotton farmers are not receiving prices as high as would prevail under free trade policies. The lower profitability that results probably has reduced production. Producer interest in exporting cotton centers around the longer staple lengths which are less suited to domestic mills or the average domestic consumer. Lifting quantitative export restrictions and modifying or eliminating the regressive export tariff would probably stimulate production through higher farmgate prices. These measures might also alter the mix of staple lengths being produced so that mills would increase imports of medium length cotton. The production of blended fabrics has risen dramatically since the mid-1970's. These fabrics normally are eighty percent cotton. One-eighth of all cloth is woven entirely from man-made fiber, and another eighth is made from blends. Increased production of synthetic fibers is unlikely to erode the income of cotton farmers given the small market share of synthetics and especially if larger exports of lint are allowed. It is possible that the advantages of blended fabrics may expand the consumption of cotton and generate some new markets. Demand for pure cotton textiles has been rather weak in per capita terms. Synthetics may serve as a complementary input in blended material, rather than displacing cotton utilization. Proposals for new synthetic fiber factories should probably not be viewed with alarm by cotton farmers. Trade issues in the short and medium term are likely to be more critical to the profitability of cotton cultivation.  -5- SECTION II TECHNICAL BACKGROUND ON COTTON VARIETIES, PROCESSING AND PRODUCTS Raw cotton, i.e. seed mixed with lint fibers (called "kapas" in India) is separated at various ginning percentages depending on the variety. A typical value is 33%-34% for varieties such as American-320F, which is a reference variety for support prices, or J-34. These varieties are grown in Punjab, Haryana, and Rajasthan and have a staple length of 23-25 mm. Digvijay, V-797, (Gujarat) and AK-235 (Maharashtra and Kar- nataka) are at the high end of the ginning percentage scale yielding 40%-41% lint. Their staple lengths are somewhat shorter averaging around 22-23 mm. Some hybrids have quite long fibers and acceptable ginning rates. H-4 and varalaximi produce fibers above 29.5 mm, which place them in the long to extra long staple category, and have ginning rates of 34%-35%. In general, there is an inverse relationship between staple length and ginning percentage, both of which increase returns to farmers through higher prices, and higher lint yields. There is a direct relationship between either staple length or ginning percentage and price -- a 3% higher ginning rate or a 1 mm longer fiber boosts the price of raw cotton 5%-10%. About 13%-15% of the fiber is lost in processing: 7%-8% of the fiber weight is waste material, 2%-3% is lost in carding; and 4% is lost in spinning. Therefore, the proportion of dry raw (seed) cotton weight that becomes yarn is in the range of 28%-35%. 1/ Over 85% of the seed weight becomes oilseed cake when the seeds of most varieties are crushed. For H-4, as an example, the oil extraction rate is 15% to 16-1/2%. The national average cottonseed oil extraction rate in the mid-1970s has been between 13.5% and 14.7%. The crushing rate has ranged from 4C%-70% between 19 70/71 and 19 77/78 - a definite increase over the 30% level of the late 1960s. 2/ The author's estimate for the crushing percentage in 1979-80 is 73%. 3/ Around 20%-25% of the value of 1/ 33% ginning rate for lint minus 0.33X15% for the lower bound; and 40%-0.4X13% for the maximum. 2/ Cotton In India -- A Profile, Directorate of Cotton Development, (Bombay, 1980), Table 10. 3/ See Footnote 6, Table 14.  -6- raw cotton is in the seeds, almost exclusively because of their oil con- tent. 1/ As a rough estimate, if a higher crushing percentage translated proportionately into higher raw cotton prices, moving from an average of 60% crushed to 10UC would elevate the price by a maximum of 10%. Cotton- seed oil production would then have reached 278 thousand tons per year, rather than the average of 167 thousand tons for 1975-78. The economic value of cottonseed oil, as well as the value of the protein in the residual pressed cake, is limited by the presence of gos- sypol in cottonseed glands. This substance is toxic to humans and presently can be removed only through expensive extraction processes. Cottonseed oil with gossypol removed had a market value of about Rs 12/kg in Central Maharashtra (early 1981). Additional detail on some of these topics is presented in Section V. 1/ Based on kapas and seed average prices for several years and varieties in Bombay.  -7- SECTION III SOURCES OF PRODUCTION GROWTH The expansion of cotton production at a growth rate of 1.8% over the last two decades can be attributed entirely to gains in yield. The estimate of the area trend is negative but not significantly different from zero (Table 1). Although the total cotton area has remained vir- tually unchanged, the irrigated cotton acreage has grown rapidly with an offsetting contraction of rainfed cotton. The shift in favor of irrigated cultivation is certainly a major contributor to the improvement in aggregate yields. It should be noted, however, that while the growth rate in irrigated area is lower over the last ten years than over the last twenty, the yield trend has accelerated, implying that other yield-increasing factors are present. Production in 1979/80 was 1.3 million tons of seed cotton from 8.08 million hectares, implying a yield of 162 kg/hectare. Coefficients of variation (ratios of the standard deviation to the mean) can be used to measure variability in area, production and yield. The respective coefficients are 4%, 18%, and 17% for the period 1959 to 1979. Slightly higher variability for yield and production has been experienced in the 1970's than in the 1960's. Reliable time-series data on yields of rainfed and irrigated cotton are not available. This makes it difficult to break the multi- colinearity that exists at an aggregate level between expanded irrigation with new inputs and trends in yields within the irrigated and rainfed subsets. Recourse was therefore made to an indirect means of estimating the importance of irrigation in the overall yield trend. The adopted approach allows the aggregate growth rate in yields to be separated into three components: an irrigation-dependent trend within states, a yield trend which is independent of expanding irrigation within states, and an altered distribution of total cotton area across states. Although the approach can be used to estimate the irrigation-related and irriga- tion-independent sources of improved yields, it does not entirely solve the multicolinearity problem. For example, the contribution of more water versus more fertilizer or improved varieties within the irrigation-related component of improved yields cannot be identified through this analysis.  TABLE 1 CONTINUOUS GROWTH RATES FOR COTTON AREA YIELD AND PRODUCTION Area Yield Production Irrigated Rainfed Total - - - - - - - - - - - - - - - -(% per annum)