Cotton spot prices have started to decline. The production outlook remains uncertain, as the weather is still volatile. However, by now, data on the demand-supply balance for 2014-15 is in the public domain. The current cotton year ending on September 30 will see record levels of carry-forward stocks.

The total stocks at the dawn of the new season would be around 83 lakh bales (170 kg). Of this around 18-20 lakh bales will lie with government agencies. Last year, these agencies (mainly Cotton Corporation of India) procured record quantities of about 87 lakh bales under its minimum support operations. Of these, about 70 lakh bales are expected to be auctioned before the season ends.

The record end-of-season stocks are also the result of sharply lower exports. India could end the season with exports of about 63 lakh bales, down by 37 per cent year on year. And this, as everyone knows, is due to lower cotton imports by China. But in place of cotton, India has seen proxy exports to China in form of yarn. Cotton yarn exports for current season are estimated at a record 1.23 million tonnes, up by 6 per cent over last year. India remains the single largest supplier of cotton yarn to the Chinese market, with a market share of more than 50 per cent. China has made a conscious shift towards cheaper cotton yarn and its consumption is believed to have grown by 4 per cent, to 306 lakh bales.

With these market dynamics in place, the new cotton season may unfold differently from the previous one. Cotton acreage is down by almost 9 per cent compared to last year. In fact, other than Telangana, no other state has reported an increase in cotton acreage. Punjab, Haryana and Rajasthan produce around 13 per cent of the crop and have seen the outbreak of white flies. This is expected to see yields in the region drop by 22 per cent. Despite improved rains in all the major cotton growing regions, there still exists the risk of excess rains at harvest time, which can hit yields and quality.

The 2015-16 crop is now expected to be down by around 6 per cent at 366-370 lakh bales. Cotton consumption could rise modestly by 2.5 per cent but if exports rise sharply due to rupee depreciation, that could tighten supply.

Factors at play The million dollar question now is whether cotton prices will dip below the MSP this year? If so, will the government have to once again procure aggressively to support farmers? In 2014-15, Shankar 6, the benchmark variety of Gujarat, touched a low of ₹14,200 per bale below MSP. There are multiple reasons why we believe that the cotton lint prices may not again head back to last year’s lows. For one, cotton seed and meal prices are just coming off all-time highs and still remain 16 per cent higher than last year. Due to initial over estimates of the cotton crop in 2014-15, cotton seed stocks were depleted much faster, leaving behind empty pipelines for seed as well as meal. The lower crop in 2015-16 will not allow these prices to come down sharply. This will increase the value of Kapas that the government procures at MSP.

Two, between last year and this year the rupee has depreciated by 9 per cent, making Indian exports competitive. Three, crop damage in North West region has reduced acreage and this pocket consumes all that it produces. Shortage of raw material here will see it import cotton from the neighbouring Gujarat, MP and Maharashtra.

This means that Tamilnadu, which consumes around half of all the output may have to depend largely on Telangana and other minor cotton-producing states. Any weather-related damage could see TN switch to cheaper imports. Overall, growth in cotton demand may not be robust due to the slowdown in China, but lower cotton production, the weak rupee and revival in the domestic economy, may lend support to prices.

Overall, Shankar 6 cotton prices may not go below ₹14,500-15,500 per bale. With current price at ₹16,300 per bale, the bottom could emerge at levels about 10 per cent below this. While these could very well turn out to be below MSP, prices are not likely to sustain at those levels limiting the need for government intervention.

The author is Vice President, Research - Agri Value Chain, Edelweiss Group.

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