COTTON RECOVERING AS DEMAND HOPES RISE

Cotton prices have recently been recovering as its supply in the domestic market has been constantly falling against good demand for quality cotton for mill consumption and exports. The reports on higher domestic consumption, prediction of lower sowing, and increased textile export demand may have a positive long-term impact on the cotton prices.

The prices of cotton have been in uptrend since March. In the spot market, the prices have increased more than 18 per cent to Rs 958.7 per 20 kg from Rs 808 per 20 kg and now corrected to 944 levels. Meanwhile, at National Commodity and Derivatives Exchange (NCDEX), ‘kapas’ prices have surged more than 21 per cent to Rs 910 per 20 kg in June from Rs 749 levels in March. At the same time cotton prices at MCX have increased about 6.7 per cent to Rs 16,200 per bale compared to prices prevailing in March.

Earlier in the season, cotton prices were under the grip of a bearish phase due to record production coupled with subdued export demand from China that resulted in a cotton glut in the domestic market. Cotton prices in NCDEX declined to Rs 14,000 a bale (170 kg) – reaching a five-year low during the last week of January. This was more than 15 per cent below the levels seen at the beginning of the cotton season, which took off in October. The prices of seed cotton (kapas) fell below the minimum support price (MSP) decided by the government. To support domestic cotton prices and prevent distressed selling by farmers, Cotton Corporation of India (CCI) has started to procure kapas at government-supported prices.

In the international market, the prices have witnessed a steady rise since February. The uptrend is seen mainly due to larger-than-expected cut in world cotton planting intentions, reports on consumption outstripping production for the next season, and dwindling deliverable stocks of high-grade cotton stocks in the world market.

Domestic Scenario

As per government data, about 9.32 lakh hectares (lh) of cotton have been planted as on the first week of June compared to 10.90 lh last year during the same period. Farmers may prefer to plant less as they had realised comparatively less profits last year due to sluggish exports. Cotton acreage in India is expected to decline to 12 million hectares as compared to 12.9 million hectares planted last year. According to the latest USDA report, production in India is estimated to be about 380 lakh bales in 2015-2016, a little lower than 390 lakh bales produced in 2014-2015.

In the domestic market, CCI is holding a majority of the quality stocks and selling it through auctioning in the open market on a daily basis to mills and spinners. It has procured about 87 lakh bales of cotton, highest in the last six years, from key growing states like Telangana, Andhra Pradesh, Gujarat and Maharashtra. As per reports, it has auctioned about 10 lakh bales since March. Therefore, as per trade estimates, cotton inventory is estimated at around 70 lakh bales at the close of the 2014-15 season. It is the highest ever cotton stock carried by India after 2008-2009.

As per the latest USDA report, India’s cotton exports are expected to increase 30 per cent to about 6.5 million bales in 2015-2016. It is expected to rise due to high carry-in stocks of quality cotton procured through the government’s procurement policy. Meanwhile, according to Cotton Association of India, if the price of cotton in the international market continues to increase, demand for shipments will rise from India and cotton export is expected to touch about 7 million bales by the end of the season. Currently it is at 5 million bales.

However, the government is very active to find other destinations (apart from China) to export excess cotton stock. Therefore, for safeguarding the interests of cotton growers and disposal of cotton procured under the MSP (minimum support price) operations, the Ministry of Textiles has asked high commissions and embassies in countries, including Bangladesh, Indonesia, Thailand and Turkey, to explore possibilities of increasing cotton exports.

Global Updates

According to the latest press release by International Cotton Advisory Committee (ICAC), “The world cotton area is forecasted to go down by 7 per cent to 31.3 million hectares in 2015-2016 due to low prices in 2014-2015 and as a result, world cotton production is projected down 9 per cent to 23.9 million tonnes”.

India is forecasted to become the world’s leading producer next year at 6.42 million tonnes (MT), according to USDA’s initial projections for 2015-2016. Chinese production is expected to fall to 5.4 MT in 2015-2016 due to lower subsidy price of Yuan 19,100 per tonne for 2015 announced by the Chinese government - down from Yuan 19,800 yuan per tonne in 2014, while production in the United States is projected down 14 per cent to 3 MT due to low international prices and adverse weather conditions.

ICAC further stated that “world cotton consumption increased 3 per cent in 2014-2015 to 24.3 million tonnes and is projected to grow another 2 per cent in 2015-16 to 24.9 million tonnes and world ending stocks are forecast to decrease for the first time since 2010-2011, falling 5 per cent to 20.8 million tonnes in 2015-2016”.

In China, domestic cotton prices fell from an average of 139 cents/lb to just under 100 cents/lb in 2015 due to the ending of reserve policy and a shift towards a more market-oriented policy. The current policy in China may provide comparatively cheaper cotton to its textile mills and this may increase domestic cotton consumption by 2.9 per cent to 7.84 MT in 2015-2016. Similarly, consumption in India is projected to go up by 5 per cent to 5.61 MT while Pakistan’s consumption is expected to grow 3 per cent to 2.42 million tonnes in 2015-2016, according to USDA projections.

Outlook

Cotton is a kharif crop and follows a monsoon pattern and therefore forecast plays a very important role in taking planting decisions. In its latest forecast, the Indian Meteorological Department (IMD) has estimated about 12 per cent deficiency in rains over the long period average. The deficient rainfall may affect cotton sowing in central and western parts of India. Further, cotton prices in India have been in an uptrend for some time now on limited arrivals against steady demand from cotton mills and textile industries. The prices were low during the peak season but have now recovered to a profitable level for the farmers to go for cotton planting. Recently, the Maharashtra government ordered the producers of Bt seed companies to cut prices.

However, huge volumes of carry forward cotton stocks available in the domestic market with the CCI, reduced exports to China, and over supply in global markets may keep cotton prices range-bound during the cotton sowing season in India.

Strategy: Sell MCX cotton June between 16,400 – 16,500; SL – 17,100; Target – 15,500 - 15,300 (CMP – 16,160).