Cotton seed oilcake faces price squeeze

Higher cotton production will keep prices capped in the near term

Cotton seed oilcake, a major source of livestock feed, has been trending lower over the past couple of months. Traded on the NCDEX, the by-product of kapas (raw cotton), peaked at ₹2,791 per quintal in July and has since fallen by a steep 28-odd per cent to ₹2,012 per quintal now. Expectations of higher production of cotton this year led to a sharp fall in prices over the past couple of months. From here on, while prices may not correct sharply, they are likely to remain under pressure in the near term.

Kapas is unginned cotton or the white fibrous substance covering the seed, obtained from the cotton plant. Upon ginning, the lint (about one-third in weight) and the seed (two-thirds in weight) get separated. While lint becomes the raw material for cotton yarn or thread, the seed is crushed for extraction of oil. The by-product which remains after extraction of oil is called cotton seed oilcake, which is mainly used as cattle feed. The cotton seed oil recovery is around 12 per cent while the oilcake forms 86-88 per cent.

In India, a major chunk (over 95 per cent) of the cotton seed is processed through the primitive method and the resultant oilcake that is extracted is called undecorticated cotton seed oilcake. This commodity (COCUDAKL) is traded on the NCDEX.

In cotton seed oilcake, the greater the oil content, the better is the quality. As per the quality specifications laid down by the NCDEX, the oilcake has to have a minimum of 6 per cent oil content.

Price determinants

Just as in the case of any other oil cake, the price of cotton seed oilcake too mainly depends on the production dynamics of the primary source — in this case, cotton or kapas. In India, though Maharashtra has the largest area under cotton cultivation, cotton production is highest in Gujarat, thanks to higher crop productivity. Other leading cotton growing States are Andhra Pradesh, Telengana, Punjab, Haryana, Rajasthan, Madhya Pradesh and Karnataka. In the states of Gujarat and Maharashtra, sowing takes place in June and July and harvesting in October and November. Fresh production of cotton seed oilcake starts after the arrival of cotton in different regions of India.

Following production of 380 lakh bales (170 kg each) in 2014-15, cotton production fell in 2015-16, causing prices to rally. According to data provided by the Solvent Extractors’ Association (SEA) (based on the figures put out by the Cotton Advisory Board), production fell to 350 lakh bales in 2015-16. This is set to increase marginally to 351 lakh bales in 2016-17. With cottonseed production set to increase to 108.8 lakh tonnes in 2016-17 from 108.5 lakh tonnnes in 2015-16, (at a conversion rate of 310 kg per bale as per SEA), cottonseed oilcake production is expected to go up to 90.9 lakh tonnes from 90.6 lakh tonnes.

Varied expectations

However, some market players believe that production was far lower at about 307 lakh bales in 2015-16.

As per estimates put out by the Department of Agriculture, Cooperation and Farmers Welfare, cotton production for 2015-16 was 305 lakh bales. This pegs the growth in cotton production for 2016-17 much higher at about 10 per cent to around 330 lakh bales. Some market players even expect a sharper 15-20 per cent growth.

Outlook

Expectations of a sharp rise in cotton production has, in turn, depressed prices of cottonseed oilcake over the past couple of months. On the demand side, the dynamics remain the same and growth is expected to be steady year-on-year.

While prices of substitutes such as guar churri, pulses churri, and rape mustard seed meal, among others, do have some bearing on the demand of cottonseed oilcake, they are not big movers of price. This is because cotton oilseed cake is a unique product and only a portion of the consumption shifts to other substitutes, if prices turn adverse.

With the price of cottonseed oilcake mainly driven by the pace of production of raw cotton, the outlook for the near term remains bearish. After the sharp fall in prices since July, the commodity has ended the year about 8 per cent lower.

While a very steep fall is unlikely from here on, the commodity will be caught in a bear grip at least in the near term.

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