Cotton blooming but correction likely

Increased supply may change the dynamics in the second half of the cotton year

So far, 2017 has been good for cotton with future prices rising 10 per cent or so in the last two weeks on renewed hope of buying as the impact of demonetisation recedes, on fears of supply shortage and procurement support from the Cotton Corporation of India (CCI).

Globally, cotton traded firm in the first half of cotton year 2016/17 (August-July), hit a near five-month high (75 cents/lb) on January 5 because of supply shortage as the bulk of the crop was still being harvested. Of late, the expectation of reduced supply from India has added to the positive sentiment. However, things may change in the second half of the cotton year on increased supply, leading to a correction in prices. The downside may, however, be capped on strong recovery in the US economy and rising income in developing countries.

Global factors

According to the International Cotton Advisory Committee (ICAC), 2016-17 is expected to begin with a carry-forward stock of 19.3 million tonnes (mt) while production is estimated at 22.8 mt (up 8 per cent year-on-year), putting the total supply for the year at 42.1 mt against a consumption demand of 24.1 mt. Thus, 2016-17 is likely to end a closing stock of 17.9 mt, down 7 per cent from 2015-16. However, the global stock-to-use ratio (excluding China) is expected to increase from 50 per cent to 53 per cent, putting moderate pressure on cotton prices in the second half.

Barring China, higher production is expected from other top producers such as India, the US, Pakistan, Brazil, and Australia. The US is expected to produce 3.6 mt due to improved weather, enhanced yields and better crop acreage. Crackdown on pink bollworm is likely to improve output in Pakistan, but it will still be below the average. Production in Australia and Brazil, the key exporters, is likely to increase by 64 per cent and 10 per cent, respectively.

China no longer price driver

China is expected to produce 4.55 mt of cotton in 2016-17 against 4.75 mt in 2015-16. China is still holding inventory of more than a year and will resume the next round of cotton sales from domestic reserves on March 6, with daily sales volume set at 30,000 tonnes.

The USDA expects China to import slightly more cotton in 2016-17 to 0.98 mt. It imported only 54,900 tonnes of cotton in November, down by 35 per cent (year-on-year) while for 2016 as a whole import is down 42 per cent to 0.75 mt.

Competition from polyester

Expectations of an improved global economy and thus better prospects for clothing demand will always provide the underlying support to cotton prices but prices of polyester fibre will remain a key factor in determining cotton prices. Polyester prices have increased a bit recently, with increase in crude oil prices post OPEC deal on production.

Domestic factors

The current firmness in Indian cotton prices is seen because of slower arrivals impacted by demonetisation and fears of supply shortage despite estimate of increased cotton production by the Cotton Association of India (CAI) at 34.5 million bales (1 bale =170 kg) of cotton in 2016-17 (October-September) compared to 33.8 million bales in 2015-16.

According to the Cotton Corporation of India, the season’s total arrival till December’16 has reached 7.5 million bales, a drop of 25 per cent to that in 2015.

However, the uncertainty over production figures remains because of the reduction in acreage by over 10 per cent. The private participants are expecting lower production at 31-31.5 million bales. The procurement support from CCI, after a gap of four years, to procure 0.15 million bales of cotton in the year ahead is expected to strengthen demand. At the same time, with more money coming into people’s pockets (waning impact of demonetisation) creating more demand is likely to be somewhat balanced with increased arrival pressure restricting the extent of upside.

India’s export of cotton is expected to fall by 34 per cent to 0.82 mt in 2016-17 due to demonetisation-led squeeze in supply when prices were running low and now with domestic prices running high, exports should be lower.

Outlook

Cotton is likely to trade steady on an expected shortfall in production, coupled with procurement support from CCI and improved domestic buying with more cash in hand. However, a likely increase in cotton arrivals, cheaper imports and not-so-bright export prospects will limit the extent of upside.

The author is Vice-President and Head Agriculture, Food and Retail at Biznomics Consulting

c:set var="prUrl" value="https://premium.thehindubusinessline.com" />

Read further by subscribing to

The Hindu Businessline

What You'll Get

  • Web + Mobile

    Access exclusive content of the Hindu Businessline across desktops, tablet and mobile device.


  • Exclusive portfolio stories and investment advice

    Gain exclusive market insights from the Hindu Businessline's research desk.


  • Ad free experience

    Experience cleaner site with zero ads and faster load times.


  • Personalised dashboard

    Customize your preference and get a personalized recommendation of stories based on your intrest.

This article is closed for comments.
Please Email the Editor