Estimated Impacts of Increasing Indian Cotton Minimum Support Price in 2018/19 on the U.S. and Indian Cotton Markets

The Indian government raised the Minimum Support Price (MSP) of cotton to Rs. 5,150 per quintal ($0.34/lb) from Rs. 4,020 per quintal ($0.26/lb) for medium staple cotton for the 2018-19 crop year. Given that India is the largest cotton producer in the world, as well as one of the largest exporters reaching 5 million bales (12%) at the end of 2017, the substantial increase in the MSP of cotton is expected to have major impacts on the global cotton market. The purpose of this analysis is to estimate the effects of recent Indian MSP increase on the current and future cotton markets. A partial equilibrium model representing the world cotton markets was used to provide estimates of the impacts of Chinese cotton tariff on the U.S. and world cotton markets over the next 10 years. Two scenarios were assumed. First, the model was run under the current situation (or baseline). Then, a second scenario assumes that India increased the MSP of cotton to Rs. 5150 per quintal for the 2018-19 crop year with all other conditions remaining the same as in the baseline. Our results suggest that the sharp increase in MSP increased the cotton production by an average rate of 2.2% above the baseline, which further facilitated cotton exports by an annual average of 17.9% above the baseline through 2028/29. As a result of increased cotton exports from India, A-Index was estimated to decrease at an annual average rate of 2.6% per year through 2028/29. In addition, our simulation results indicated that the policy change would only have minor impacts on the U.S. cotton production, consumption, ending stocks and exports (all less than 1%, on average). The U.S. cotton farm price was negatively impacted and was projected to decline by an average of 2.2% per year through 2028/29.