Cotton Export and Export price parity

Cotton Export and Export price parity

Subject: Economy

Section: Agriculture

Context: Spiralling prices of cotton, resulting in demands by the textile and garment industries to ban exports of the fibre.

Details:

India is the world’s second largest cotton producer (after China) and third largest exporter (after the US and Brazil).

High global prices have pushed up domestic prices closer to export parity levels, thus making exports attractive, while simultaneously making imports more expensive.

How much have cotton prices gone up?

• Fall in domestic production-This has been largely due to the diminishing benefits from the genetically-modified Bt cotton, as it has become increasingly susceptible to pink bollworm and white-fly insect pest attacks, making it riskier for farmers to grow the crop. Besides, the government does not permit testing or commercialisation of next-generation transgenic breeding technologies.
• Rise in the international prices of cotton-The Cotlook ‘A’ Index price – an average of representative quotes in the Far East destination markets – is currently ruling at 167 cents per pound, up from 92 cents a year ago.
• Higher Consumption-Demand has significantly increased, as mills and other users were operating at sub-optimal levels in the past few years.

How justified is the demand for a ban on exports?

• Not supported by  present export-import balance-India’s cotton exports are actually projected at 40 lb this year, down from the 78 lb of 2020-21.Imports are likely to be higher, given the elimination of import duty on cotton.
• Potential of automatic decline-domestic prices already rising to international parity levels, exports would slow down in the natural course.
• No potential decline-as crops already sold.
• Wrong single to market-as sowing season near.

Concept:

Export Parity Price (EPP) is defined as the price a producer receives or can expect to receive for his/her product/produce when exported, equal to the Freight on Board price minus the cost of getting the product from the farm or factory to the border or destination country. Where a country or a region in a country has a surplus of a product that is exported, the EPP is determined by considering the Import Parity Price or International Benchmark Price of the commodity and other trade factors. The EPP applies only to the quantity that is exported and not to the quantity that is sold domestically.

EPP represents the price which exporters would realize on export of a product. This includes FOB price + Advance License benefit or ALB for duty free import of crude oil pursuant to export of refined products.

The Import Parity Price (IPP) is the price of a product that is imported at the border, which includes international transport costs and tariffs. If a product is cheaper abroad, i.e. the domestic price is higher than the IPP, traders have a strong incentive to import the item.

A comparison of the time series of domestic wholesale prices of the main staple food, import parity prices and import quantities can give an indication whether traders are responsive to price changes.

Thus, Import Parity Price (IPP) – IPP represents the price that importers would pay in case of actual import of product at the respective Indian ports and includes the elements of Free on Board (FOB) price + Ocean Freight + Insurance + Custom Duties + Port Dues, etc.

EPP and IPP together define a range of the possible equilibrium prices for an equivalent domestically produced good.