Cotton likely to trade ‘lower to steady’

Despite abundant stocks, robust buying by mills will support prices

India, the top global producer of cotton, is likely to witness a big jump in its production due to favourable weather and better prices of the crop that has led to increased acreage.

The first three months of 2017 saw a fillip in cotton prices on renewed buying, robust export, and delayed arrivals amid farmers holding stocks in anticipation of further price rise.

That led to cotton futures touching a high of ₹22,120/bale in March. However, that followed sharp corrections afterwards on expectation of ample supply, both from India and the rest of the world, coupled with increase in domestic arrivals, though improved buying by mills limited the fall in prices.

With Punjab reporting cotton acreage up 53 per cent, the overall acreage is likely to increase by 12-15 per cent for the new season.

According to the Cotton Association of India (CAI), 32.6 million bales of cotton have arrived in the domestic market till mid-June’17. The CAI estimates cotton supply at 41 million bales for MY2016-17 against a total demand of 35.5 million bales, leaving abundant cotton stocks to open MY2017-18.

However, robust buying by domestic mills will limit the fall in prices.India has raised the MSP of cotton by almost 4 per cent to ₹4,320/quintal for the 2017-18 season.

Imports and exports

A firm rupee and expensive domestic cotton, that too of inferior quality (high trash, moisture and adulteration), forced the millers to go for bulk import in 2016-17. It was economical for Indian mills to import cotton from Australia, the US and Africa than to procure from Maharashtra or Gujarat.

The CAI, in its latest report, forecast an import of 3 million bales for 2016-17, which now looks to be limited at 2.5 million bales, owing to cancelling of recent contracts

For MY2016-17, the CCI has projected India to export 5 million bales of cotton but with national and international market rates reaching par, exports may be restricted at 4 million bales.

Prospects of strong rupee, a good crop in Pakistan and reduced global prices owing to high output will mar India’s future export prospects.

Due to increasing emphasis on design, drape, look and feel, the demand for synthetic/man-made fibre-based clothing has grown exponentially, limiting the demand for natural fibres such as cotton.

However, lower GST for cotton (5 per cent) vis-à-vis man-made fibres (18 per cent) will continue to support cotton consumption.

Global scenario

The price-driven increase in global cotton acreage by 8 per cent in 2017-18 (August-July) is likely to push the global production higher to 24.98 million tonnes (mt), according to the USDA.

Consumption is estimated at 25.37 mt on strong demand from Vietnam, Bangladesh, China and India. As a result, cotton stocks at the end of 2017-18 are expected to be at 19.1 mt against 19.45 mt in 2016-17. However, if we total the ending stocks of 2017-18 barring China, then it will be up by 20 per cent (YoY) and a record high.

The Chinese policy of continued auction of cotton from its reserves has reduced its import hunger over the last few years. However, the sale of old stock at high prices may induce Chinese millers to focus on outside markets and that may support import demand for 2017-18.

The USDA forecasts US cotton output to reach a 10-year high at 4.2 mt (2017-18) on significant increase in acreage.

Outlook

Cotton is likely to trade lower to steady on expectations of high output, supported by increased acreage locally and globally. Reduced prospects for export will further dampen the sentiment. However, robust buying by mills on high domestic consumption will continue to provide support to prices.

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

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