The minimum support price (MSP) for cotton was Rs. 4000 while it was traded at Rs.4200-4500 a quintal. The CCI is ready at all cost to make cotton purchases from the market at the minimum support price. Reports were issued from an official that the Cotton Corporation of India had laid down strategies to make large purchases and had minimum expectations with regards to interventions in the world cotton market for Minimum support price operations apart from in Andhra Pradesh (Pindyck&Rubinfeld, 176).
Definition of terms
The discussion will focus on issues concerning the cotton market. But before that, its impoertant we understand the meaning of the following terms;
• Resources: These are goods that are used in production stages
• Economic Goods: These are goods which are scarce due to more demand in the market
• The price system: This is a situation whereby vital economic decisions are made as a result of workings of the market price of a commodity.
• Supply: This refers to the quantity of a product that an industry is willing and able to produce per unit time with relation to demand in the market.
• Demand: This is the quantity households are willing and able to purchase in the market at subsequent prices, per unit of time, which other things held constant.
• A firm supply curve: This is a graph showing a relation between the price and t quantities of a commodity a company is prepared to supply at the stated prices.
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The MSP was Rs. 4000 per quintal while the cotton traded at Rs.4200 to 4500 in Andhra Pradesh. This place was highly affected by heavy rains that had been experienced. Three to four lakh bales of cotton were really affected. As a result of these, the damaged cotton had to be sold at lower prices than the normal prices. However, The Cotton Corporation of India stuck to its goal to purchase only the cotton that met the quality standards that had been established. The corporation was visionary in the sense that it looked at a long term plan to purchase cotton commercially but this was also determined by the proper timing that the company had to set.Questions about how the corporation would raise its funds were raised. In a perfect competitive market, the company tends to generate the funds from its internal sources (144). However, the company had not been making adequate profits because there were many players in the market. The result of this was that there was a reduction in the unit price of the cotton.
The supply was more than the demand in this scenario. Shankar, which is a6 variety of cotton through spot buying, was sold at Rs. 40, 500 per candy over the weekend, yet the price was at Rs. 6000 higher, making it close to Rs. 50000 over a month ago. This can be explained by the fact that the supply was higher than the demand in the market (168).
This therefore led to the market getting flooded with a particular product therefore making the farmers reap less and resulting in a lot of waste in the market. Fears have however been raised that if the condition continues to prevail in the same state for the forthcoming three months, then the unit prices for the bales of cotton would drop to MSP levels. The government of India announces the Minimum Support Prices (MSP) for the major commercial cash crops from year to year. The purpose as to why the government does this is to cater for the interests of the farmers at the same time encouraging them to be self-reliant (67). The farmers have a choice to sell their produce to the government or freely the market at a minimum support price that favor them in terms of inputs the put and the returns they get (profits). The government of India has come up with a price support policy that aims at giving farmers insurance against falls in farm prices. The market price is set in such a way that it cannot drop beyond the fixed minimum price. Price setting for a commodity is very important in the sense that it determines how various firms are competing in the market (55). It also guarantees the survival of the cotton product in the market.
However, the government also plays a key role in ensuring that the products price is maintained and that the farmers are getting sufficient returns for sustainability (100).
- Pindyck, Robert S., and Daniel L. Rubinfeld.Microeconomics. 6th ed. Upper Saddle River, N.J.: Pearson Prentice Hall, 2005. (Pg 1-250)
