Cotton MSP hiked by 28, 26 percent

The minimum support price (MSP) of cotton in India was increased by 28 percent for medium staple cotton and 26 percent for long staple fibre cotton after five years of single digit increases in an effort to encourage farmers to continue farming it.

The last time cotton prices increased at a similar rate was in 2013

The last time cotton prices increased at a similar rate was in 2013 when prices rose by 29 and 22 percent for medium staple and long staple fibre cotton. However, despite the steep price increase, cotton prices are still currently higher than the new MSP due to a global and domestic supply deficit.

The reason the MSP of cotton was hiked was to alleviate some of the struggles faced by Indian cotton farmers. At a time when the government is striving to increase domestic production on all fronts as part of its “Make in India” campaign, it is trying to keep cotton farmers in work.

However, spinning mills could face troubles due to the elevated MSP. Large integrated spinning mills have seen their earnings before interest, tax, depreciation and amortisation (EBITDA) margins improve over the past four financial quarters and so may be able to withstand higher cotton prices but smaller mills may suffer.

MSPs are designed to mitigate the risk of changing prices and the current MSP is designed to ensure a 50 to 60 percent return on the cost of production. Reasons why production prices have increased include large scale pest issues and a reduction in crop acreage.

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