Buoyant domestic cotton prices, supported by a hike in the government support value, have cut prospects for Indian exports of the fibre, and opened up the prospect of it following China in building large state reserves.

Relatively high prices mean that cotton shipments from India, the second-ranked exporter, have slowed "to a trickle" despite the lifting of ban on sales abroad, the US Department of Agriculture's bureau in New Delhi said.

The bureau cut by 900,000 bales, to 9.9m bales, its forecast for India's cotton shipments in the 2011-12 season, to the end of this month, and cautioned that prospects for early 2012-13 "appear dim".

"Some Indian cotton is being shipped to nearby Bangladesh, but few others are purchasing Indian cotton at current prices," the bureau said in a report.

According to the Indian Cotton Association, cotton is selling in India, ex-gin, at 35,400 rupees per candy, equivalent to $620 per candy or 79 cents a pound, far higher than New York futures.

New York's spot, but thinly-traded, July contract closed at 70.78 cents a pound on Friday, when the benchmark December lot finished at 70.62 cents a pound, a gain of 0.1% on the day.

'Priced out'

Indian cotton values are being supported by hikes in the country's official so-called "minimum support price" paid to farmers for fibre, despite weaker international markets.

The minimum support price for medium-staple cotton was raised 29% to 3,600 rupees per 100 kilogrammes for 2012-13, and for long-staple supplies by% to 3,900 rupees per 100 kilogrammes.

Besides acting to tighten near-term cotton supplies, as growers hoard supplies for sale next season, the increases "could create a floor that prices Indian cotton out of foreign markets", the USDA bureau said.

As a guide, market prices earlier this season comparable to the new minimum support price translated into an ex-gin price of some 80-85 cents a pound, well above futures.

'Another big source of uncertainty'

For India to price itself out of export markets would transfer to the state-ruin Cotton Corporation of India the onus of enforcing the minimum support price through intervention purchases.

It "seems like a good bet" that the corporation will "have to ramp up procurement operations in 2012-13… unless there is a significant increase in world cotton prices", the bureau said.

Indeed, the "higher minimum support price could result in a return to large-scale procurement operations by the corporation".

A rise in Indian inventories would likely be seen as further obscuring prospects for the cotton market clouded by a Beijing programme to rebuild state inventories, which has seen Chinese imports near-double to 5.1m tonnes in 2011-12, according to the International Cotton Advisory Committee.

Large inventories raise the question of when, and at what price, the stocks will be run down.

"The India policy situation represents another big source of uncertainty that the market has to deal with," said John Robinson, cotton marketing economist at Texas A&M University.