Spotlight. Cotton blooms as stocks shrink

Bucking the general bearish trend, cotton has emerged one of the safest bets among all agricultural commodities in 2017-18.

Thanks mainly to record-low carry-over stocks, expectation of reduced output and upsurge in export demand as China closes its doors on US cotton.

The strength in the prices of cotton is likely to continue in the near term due to the intensifying China-US trade war, shrinking stocks, robust domestic demand from textile mills and government’s supportive procurement measures in the run-up to the State and general elections. However, weather will remain a critical factor, going forward.

Tight supply

The apex body, Cotton Association of India (CAI), sees cotton output at 365 lakh bales (government estimates is lower at 324.8 lakh bales) for 2017-18, making effective annual supply at 416 lakh bales against the consumption requirement of 324 lakh bales and exports estimated at 70 lakh bales.

As a result, the new cotton year (October-September) is likely to start with a stock of 22 lakh bales, which will be the lowest in the past 10 years.

Further, CAI’s forecast of 3-4 per cent fall in cotton output to 350 lakh bales in the upcoming 2018-19 season adds to the supply woes.

The attributing factors are low rainfall, reduced acreage, switch to other crops and heavy infestation of pink bollworms in the major growing areas.

Reduced crop acreages and electoral compulsion to keep farmers happy in the run-up to the general election early next year have led to the government increasing the minimum support price (MSP) of medium-staple and long-staple fibre cotton by 28 per cent to ₹5,150 per quintal and 26 per cent to 5,450 per quintal, respectively. The proposed MSP ensures more than 50 per cent returns over the cost of production.

Given the tight demand-supply situation and the MSP hike, cotton growers are receiving 10-15 per cent above MSP as new season crop has begun arriving in Haryana and Punjab since September 1.

The government has hinted at a robust procurement programme this year, while extending the direct procurement by Cotton Corporation of India (CCI) and State agencies, to the northern States as well.

Export prospects

India’s export shipments have more than doubled to 14-16 lakh bales of cotton vis-a-vis in September 2017, mainly due to improved demand from China, relatively lower domestic prices and a falling rupee that improves export-price competitiveness. China’s retaliatory trade action of an additional 25 per cent import tax on US cotton has allowed India to grab a bigger share of the Chinese market. That brightens the prospects of India’s cotton in the export market. The Cotton Advisory Board has estimated that India will be able to export 70 lakh bales in 2017-18 against 51.2 lakh bales a year ago.

Indian cotton is among the cheapest in the world and a weak rupee now at 72-73 to a dollar will make India’s cotton exports more competitive. The country will also have an edge in the freight cost due to its nearness to China.

Supported by decade-low domestic stocks, lower crop estimates and high demand in the domestic market, cotton prices are expected to trade positive. Then, there’s the increase in export demand prompted by the Chinese de facto ban (through increase in import duty) on US cotton. Recent heavy rains may further dampen the prospects of cotton output.

However, bearish signals from the benchmark US cotton futures may restrict the gains in cotton prices.

The writer is Vice-President and Head Agriculture, Food and Retail at Indonomics Consulting

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