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Impacts of increased MSP in India on world & US cotton markets
09 Sep '09
5 min read
These values were assumed to be held constant over the next five years (the forecast period). Based on these simulations, we developed projections of impacts of the MSP increase on world cotton production, consumption, price, and trade.
The top set of numbers represent the world cotton price with no increase in the MSP above pre-2008 levels (the “No MSP Increase” scenario) as well as the projected world price under the increased MSP (the “MSP Increase” scenario). Finally, the percentage difference between the two prices shows the relative impact of the MSP increase. For example, in 2009/10, the projected A-Index without an increase in the MSP was 66.41 cents/lb, while the projected A-Index after the increase in the MSP was 62.32 cents/lb, or a decrease in world price of 6.16%. This implies that the increase in the MSP is projected to lower world cotton price by 6.16% in 2009/10 with all other things being equal.
Over time, the impact of the increase in the MSP decreases as other countries adjust production to lower prices. But, the average impact of the increase in the MSP is about 2 cents/lb or 2.80%. Interestingly, this magnitude of change in price resulting from the increase of the MSP is approximately equal to the impact estimated for the entire U.S. cotton program. Thus, the increase in the MSP in India is anticipated to have a relevant impact on world cotton price.
In India, the increase in the MSP is expected to lower India's domestic price by an average 2.59% over the five year period. These lower domestic prices do not substantially affect domestic mill use, but do increase net exports by an average 11.11%. At the same time, cotton area is expected to increase an average 1.56% and cotton production increase an average 2.88% over the forecast period.
The increase in the MSP in India is expected to decrease farm price in the U.S. by an average 2.48% over the forecast period, and result in relatively small decreases in acreage, production, mill use and exports, and increase ending stocks by a small amount. The likely net effect of the MSP on the U.S. is to increase the amount of government payments by an approximate average $190 million per year to the cotton sector to offset declining farm prices.
The top set of numbers represent the world cotton price with no increase in the MSP above pre-2008 levels (the “No MSP Increase” scenario) as well as the projected world price under the increased MSP (the “MSP Increase” scenario). Finally, the percentage difference between the two prices shows the relative impact of the MSP increase. For example, in 2009/10, the projected A-Index without an increase in the MSP was 66.41 cents/lb, while the projected A-Index after the increase in the MSP was 62.32 cents/lb, or a decrease in world price of 6.16%. This implies that the increase in the MSP is projected to lower world cotton price by 6.16% in 2009/10 with all other things being equal.
Over time, the impact of the increase in the MSP decreases as other countries adjust production to lower prices. But, the average impact of the increase in the MSP is about 2 cents/lb or 2.80%. Interestingly, this magnitude of change in price resulting from the increase of the MSP is approximately equal to the impact estimated for the entire U.S. cotton program. Thus, the increase in the MSP in India is anticipated to have a relevant impact on world cotton price.
In India, the increase in the MSP is expected to lower India's domestic price by an average 2.59% over the five year period. These lower domestic prices do not substantially affect domestic mill use, but do increase net exports by an average 11.11%. At the same time, cotton area is expected to increase an average 1.56% and cotton production increase an average 2.88% over the forecast period.
The increase in the MSP in India is expected to decrease farm price in the U.S. by an average 2.48% over the forecast period, and result in relatively small decreases in acreage, production, mill use and exports, and increase ending stocks by a small amount. The likely net effect of the MSP on the U.S. is to increase the amount of government payments by an approximate average $190 million per year to the cotton sector to offset declining farm prices.
Texas Tech University
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