Cotton prospects pick up

Lower output expectations, US-China trade tiff to keep prices firm

Cotton was the star performer in 2017 compared to other agricultural commodities that suffered amidst the global glut. It performed well probably because of the crop damage concerns in India and Pakistan. In the last six months, cotton prices in India have traded broadly at ₹20,000-21,500 per bale (1 bale = 170 kg).

Cotton is expected to trade firm even in the near future on the reported loss in yields and quality in 2017-18, expectations of lower output in 2018-19 and the unexpected surge in demand for Indian cotton due to an ongoing trade war between China and the US. However, the hopes of a good monsoon in 2018 can restrict the upside.

Receding supply surplus

The Cotton Association of India (CAI) in its latest release forecasts that India’s total cotton supply will be at 410 lakh bales for the 2017-18 season starting October 1, including the opening stock of 30 lakh bales along with 20 lakh bales from imports, against the domestic consumption requirement of 324 lakh bales. That will leave the current season with a carry-over stock of 21 lakh bales by September this year. The CAI has drastically reduced the estimate for the country’s cotton production at 360 lakh bales for 2017-18 as compared with its November 2017 prediction of 375 lakh bales, mainly on account of heavy damage due to pink bollworm infestation.

Bt cotton, which brought white gold revolution to India, has been showing resistance to the pest for the past 2-3 years. The rising incidence of bollworm infestation is prompting cotton growers to switch to other crops such as soybean, maize or chilli. This may lead cotton acreage to shrink 15 per cent in the 2018-19 sowing season, from the current 122.6 lakh hectares.

India accounts for about a third of the global cotton area, and within India, two-thirds of the cotton is produced in central India including in Maharashtra, Madhya Pradesh, Gujarat and Odisha.

The arrival data shows that more than 80 per cent of the current season’s cotton crop has already reached the market by March 31, 2018. There is also a dearth of good-quality cotton crops in the available stocks. That shows the market is likely to witness tight supply situation before the crop arrivals from the 2018-19 season begin. Around 90 per cent of cotton mills have inventories to run their mills for only 1-2 months.

Domestic demand has also started showing signs of improvement on expectations of accelerated consumption of yarn and textile, in addition to the demand from exporters. Mills have intensified their buying operations.

Although the global production is expected to slightly exceed consumption in 2017 (25.7 million tonnes vs 25.4 million tonnes), the threat of pests and unfavourable weather conditions, steady textile demand in the emerging markets, and rising production cost of synthetic fibres, are likely to aid the demand for the crop.

US’ pain, India’s gain

The global financial market has become volatile due to the ongoing rift between the US and China over trade tariffs. In a major move, the US on March 23 increased import duties on steel and aluminium, primarily targeting imports from China. China on April 2 retaliated by announcing to impose 25 per cent taxes on a range of products imported from the US, including cotton.

This provides an opportunity for Indian cotton, which is trading at a huge discount to its counterparts, to see demand. India is expected to treble its export shipments of cotton fibre to China the next season. It also needs mention here that with China’s cotton reserves having fallen drastically, the country is all set to resume its imports.

Demand for Indian cotton looks promising also because of the advantage that it is trading at 82-85 cents per pound against the 90 cents per pound of that from the US and Brazil, which will make traditional buyers such as Bangladesh and Vietnam give more export orders to India going forward.

Outlook

Cotton prices are likely to remain firm on account of a tight supply situation, less availability of good-quality cotton, crop damage concerns and robust export demand. However, any delay in the Chinese imposition of duties on the US cotton or good monsoon prospects may lead to a correction in the domestic market and limit the extent of the upside.

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

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