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Impacts of increased MSP in India on world & US cotton markets
Sep '09
The Cotton Economics Research Institute (CERI) coordinates economic research activities on all aspects of cotton research (e.g. production, marketing, trade, processing, value added) within Texas Tech University and other research units throughout the United States and other countries. CERI releases the report on cotton prices.

Domestic subsidies for cotton and other commodities have been a major topic of interest, especially during the Doha Round of the World Trade Organization trade negotiations. Many developing countries have insisted that domestic subsidies in countries like the United States represent significant trade barriers because they lower world price below their cost of production. India, Brazil, and other developing countries intimate that unless these domestic subsidies are lowered, they are unwilling to provide any more market access concessions in trade negotiations.

However, these countries utilize domestic subsidy programs as well. India, for example, uses a minimum support price (MSP) program, which is similar to the U.S. Commodity Credit Corporation non-recourse loan program. The Government of India (GOI) annually sets the MSP for each growth region, which represents the price at which the government will purchase seed cotton from farmers. The Cotton Corporation of India (CCI) is then responsible for executing the MSP program.

Generally, the MSPs are based on the expected cost of production and are not linked to the market price of cotton (lint). The market price for seed cotton is typically above the MSP, but in September 2008, the GOI announced a significant increase in the MSP of seed cotton, with the increase ranging from 26 – 48% depending on the variety (FAS, 2008). Based on Adams (2009), that level of MSP equates to about $0.72/lb (lint equivalent) for the most commonly produced varieties of cotton. Compared with international prices of $0.55 to $0.58/lb, the MSP is above international prices and therefore may have a direct impact on production and trade flows. In fact, in 2008, the CCI was authorized to purchase as much as 11.7 million bales from the Indian crop in order to maintain the MSP.

The purpose of this paper is to examine the impacts of the increase in the Indian MSP on global and U.S. cotton markets in terms of both price and cotton trade. We utilized a partial equilibrium structural econometric model of the world fiber market developed by the Cotton Economics Research Institute at Texas Tech University (Pan et al.). The structural model first establishes a baseline forecast of the world cotton market along with individual countries and production regions under the status quo of agricultural policy as it exists today and based on macroeconomic assumptions developed by Global Insight. Next, a new projection of world cotton markets was developed under the increased MSP for India with all other policies and macroeconomic assumptions remaining as in the baseline. Specifically,we assumed that the seed cotton MSP is set at 27,500 rupees/metric ton, with a gin turnout rate of 35% to develop projections of lint cotton production and trade.

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