Raw Input. There’s too much cotton around

Since August last year, domestic cotton prices have headed south, mirroring the trend in global markets.

The Cotlook A index for cotton prices is down 26 per cent over the past year.

The thorn in the commodity’s side was China, the world’s largest consumer, whose cotton policies have global consequences. Last year, China changed farmer support policies, began restricting cheaper imports through its import quota system, and then started selling from the reserve stocks it holds. The resultant drop in Chinese demand impacted global prices and prospects for India, for which China is the largest export market.

According to USDA reports, Chinese imports have shrunk about 70 per cent in the past three years. This apart, the alternative to cotton — synthetics — has also turned cheaper on falling crude oil prices.

Supply in excess On the domestic front, cotton prices lost 28 per cent over the past year. A sharp decline began in August, when the crop’s marketing season kicks off.

Cotton production was already up 9 per cent in the 2013-14 season to 39.8 million bales, according to Cotton Corporation of India. Now, production estimates for the 2014-15 season, at 40 million bales, are not much higher than the year before due to lower yields.

But even so, this level of production is above the five-year average of around 34 million bales.

The absence of China in absorbing this increased supply put a lid on prices. India’s exports to China dropped 26.4 per cent between April and October 2014, going by India Ratings & Research reports.

While exports to countries such as Pakistan and Bangladesh can pick up, overall exports are still low.

The Cotton Corporation estimates that total exports will drop 23 per cent in the 2014-15 season over the previous one.

Domestic mills haven’t taken advantage of the lower prices and stepped into the fray either, to make up for lower exports. Growth in global demand has not significantly gathered pace. Domestic demand is also muted as wary consumers kept away. Mill consumption is estimated to move higher by just around 4 per cent for 2014-15, resulting in higher stockpiles.

Adding to the woes of excess supply, minimum support prices for cotton have moved higher only marginally by ₹50 or so, below the approximate increase of ₹100 the season before. Market prices are now ruling below minimum support prices.

In the medium term, the situation is likely to remain the same and prices for cotton may not see a sharp climb.

Here’s why. The USDA predicts a fall in production, with large producers such as China, the US and Pakistan reducing output. The Indian market is set to remain flat, but will still be the top producing region for the second year running.

China factor Usually, change in cotton prices in a particular year impacts demand the following year. Demand may, therefore, pick up in the coming quarters owing to the sharp 25 per cent drop in cotton prices.

But with higher cotton stockpiles to draw on, this demand can be met even with the reduced production.

Moreover, much of the increase in demand is estimated to stem from the Chinese market, which holds almost half the global stock.

The country’s cotton policies and import restrictions can keep up the pressure on prices. In Indian markets too, the muted export climate and higher stocks can restrict price rises.

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