The Economics of Cotton


You don’t have to be an economist to want to understand the economics of “the fabric of our lives.” Case in point: The recent ban on cotton exports by the Indian government has piqued my curiosity. I wanted to understand whether this ban would have an impact not only on the cotton farmers, particularly those growing organic and fair-trade cotton, but also what impact it might have on us as consumers.

What I learned is that there are no clear answers.

Fact: the price of cotton is at a 15-year high.

Why? According to Eco Textile News, this is the result of Indian authorities lowering cotton export tax rebates. With higher rebates there is more incentive to export raw cotton. Once you lower those tax rebates, you are effectively lowering its export appeal. Supply goes down, but demand is up (marginally), and the price of cotton rises.

So why ban raw cotton export altogether? What does this mean to the farmers? And what will be the impact to consumers?

The reason for the ban is simple, if you are the Indian government and your best interest is to protect the textile industry. A robust export market means a shortfall in the amount of cotton available for India’s own textile manufacturing sector. When you factor in China as a fierce competitor, this makes sense. China is, after all, the world’s largest cotton importer.

When it comes to the impact of the ban on cotton farmers, there are conflicting views.

On the one hand, some experts contend this decision was made in haste, out of panic over the fact that cotton prices have risen by 80%. And, that by restricting exports, cotton farmers (particularly organic and fair-trade growers) are not seeing any of the benefits enjoyed by the cotton traders. The organic and fair-trade cotton growers in India rely heavily on its export, and some believe that when times are good, these communities should be supported rather than punished.

On the other hand, some organizations support the banning of raw cotton export from India.

“I believe the true value of this commodity is long overdue, and has been taken advantage of for so many years,” says UK Pants to Poverty representative Ben Ramsden. “Without any move to keep cotton within India, the booming Indian textile and garmenting industry could be considerably challenged, putting further strain on this very fragile industry.”

Will we feel this impact on our wallets?

In some cases, fabric suppliers could pass their costs up the supply chain. This would result in retailers paying more for basic cotton items such as socks and t-shirts. However, some industry experts claim the ban will have little impact on domestic cotton prices, as most of the exports for the current cotton season have already been committed. So if we do feel any price sting, it will likely be marginal.

To this end, Ramsden says, “If this goes some way to enabling us all to understand more about where our clothes come from, and why our choices can change the world, then the whole exercise will be fantastic.”

Image: Ken Lund