NEW DELHI/SINGAPORE India will sell cotton to local buyers from government stockpiles, joining China as the world's top two consumers try to cushion domestic textile mills against soaring costs.
The sales by China and India, also the two leading producers, should ease tight supplies and help cool global prices that have soared 20 percent this year on strong demand - partly because of the Asian giants' hoarding.
China, the world's largest consumer, is expected to sell about 3 million tonnes of cotton this year from state reserves of around 10 million tonnes, Terry Townsend, executive director of international farm group ICAC, said on Wednesday.
"We expect China stocks at the end of the season will be down to 7 million tonnes," Townsend told Reuters in an interview in Singapore.
In India, an official at the partly state-run National Agricultural Cooperative Marketing Federation said a decision was being taken on stock sales that should take place from April.
Earlier, replying to a query on whether the cotton Corporation of India would sell stocks in the open market, Trade Minister Anand Sharma said: "That will happen."
Both India and China have bought domestic production to guarantee returns for their farmers, but the move appears to have backfired, squeezing profits for textile mills as prices have surged.
Domestic prices in China are 50 percent above world prices, while in India they are roughly on par, against a usual discount of around 5 to 7 cents per pound.
China's stockpiling is expected to gobble up more than half the world's cotton surplus - even though it should be a record - by the end of the crop year in July, according to the U.S. Department of Agriculture.
Investment from speculators on expectations of continued hefty purchases from China helped push U.S. cotton futures to a one-year high of 93.93 cents a pound last week, but they remain well below their record above $2.20 a pound hit in March 2011.
Cotton on ICE Futures U.S. fell on Wednesday as fears the release of government stocks could hamper demand.
"This reminds people that there is still cotton that could potentially come onto the market," said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant.
The most-active May cotton contract on ICE was down 0.81 cent, or 0.89 percent, at 90.22 cents a lb at 11:23 a.m. EDT (1523 GMT).
Merchants and mills in the United States, the world's largest cotton exporter, said physical supplies have tightened recently due to continued strong export demand even as futures prices have rallied.
"The current price level is supported only by this reserve policy of China," ICAC's Townsend said. "If the reserve did not exist, prices today would be around 60 or 70 cents a pound."
While the USDA expects an annual rise of 4 percent in cotton consumption in the year to July 2013, that would still be 12 percent below its peak in 2005/06, due in part to high prices that have made cotton less competitive.
"Cotton needs to come down to around 70 or 80 cents a pound to be competitive with polyester," Townsend added.
India will sell cotton from stocks of 2.5 million bales (425,000 tonnes) out of a crop expected to total 33 million bales in the year to September 30, 2013. Domestic mills normally use about 26 million to 27 million bales.
"This move will support the industry and stabilize prices, restricting any further rise," S. Dinakaran, joint managing director of Sambandam Spinning Mills said, adding that private traders might then also sell stocks to pre-empt price falls.
He expected prices to drop by around 1,000 rupees per candy from current spot prices for the most commonly traded Shankar-6 variety of 38,500-39,200 rupees per candy of 356 kg. Spot prices hit a record high around 62,000 rupees in March 2011.
Both countries could also import to help tame domestic prices.
China could double volumes approved to nearly 1.7 million tonnes from April, according to trade sources, favoring mills that sell their textiles for export.
India will also turn to imports, which could jump about two-thirds in 2012/13, according to the Confederation of Indian Textile Industries.
(Additional reporting by Chris Prentice in NEW YORK, Meenakshi Sharma in MUMBAI and Naveen Thukral in SINGAPORE; Writing by Jo Winterbottom and Clarence Fernandez; Editing by Michael Urquhart and Maureen Bavdek)