Limited downside for cotton

Ample supply is set off by crop quality concerns and firm demand

Most of the agricultural commodities, barring cotton and sugar, have given poor returns in the crop year of 2016-17 (July-June).

Uncompetitive prices of other crops, especially oilseeds and pulses, along with remunerative cotton prices supported by favourable weather forecast led to Indian farmers switching to cotton.

Expectation of a bumper harvest pushed cotton futures prices down to the level of ₹18,040/bale (in August) after a high of ₹22,120/bale (in March). Prices are currently trading at ₹18,730/bale, which reflects moderate demand. That is providing the underlying support to cotton prices.

Reports of crop damage in key producing regions, both within India and outside, have also provided support to cotton prices.

Global, domestic factors

For the year 2017-18, a record high of global cotton output, at 120.8 million bales, is estimated, with increased output expected from all major producing countries, namely India, China, the US, Pakistan, Australia and Brazil.

The recent hurricanes (Harvey and Irma) in the US are likely to affect the quality and size of the crop, which implies better export prospects for Australia and India.

Despite that, the US Department of Agriculture (USDA) expects the US to produce 23 per cent more cotton in the current season. However, it sees the relatively lower cotton prices keeping demand steady. After a second successful year of cotton auctions from its state reserves, it is anticipated that China may ease import restrictions and allow increased imports. However, China’s import policy always will remain a wild card for cotton suppliers till official confirmation validates the same.

Given expectations of a bumper harvest, India is likely to retain the status of the world’s top cotton producer for the third year in a row.

As on October 6, official data reports a 13 per cent y-o-y increase in cotton acreage to 12.24 million hectares.

As a result, cotton output may go up to 37.5 million bales in 2017-18 compared to 34.5 million bales in 2016-17, though the prolonged dry spell of July-August might have damaged the crop to an extent, with implications for yield. The continuing post-monsoon rainfall in October may cause increased pest attack. However, the exact quantum of loss will be clear only when arrivals start.

Besides, a carry-over stock of 3.32 million bales from the previous season, combined with an expected higher output in 2017-18, will ensure a comfortable supply, which will limit price gains, if any.

On the other hand, expecting higher output, Cotton Corporation of India has assured farmers (barring Telangana) of procurement support if prices fall below the minimum support prices.

The procurement operation by private traders is already on in Telangana but at below MSP due to high supply and more moisture content in the cotton seed, amid recent rainfall in the State. Moreover, the moderate consumption demand from mills may hold prices from falling below the MSP.

America’s pain, India’s gain

Because of the hurricanes in the US, the world’s top cotton buyers have shifted their focus to India.

The proximity advantage and the recent rally in global cotton prices helped India clinch increased export orders from its neighbouring countries, where it was struggling to export just a few weeks before, due to the stronger rupee and low global prices.

The expectation of a surplus cotton crop in 2017-18 even after experiencing some yield loss due to unfavourable weather will cap domestic cotton prices in future but that will improve export competitiveness.

Outlook

The cotton market seems to have discounted the news of ample output anticipated from the new season. That will limit downside risk, well supported by crop quality concerns and relatively firmer demand.

The arrival pressure in the coming days may bring some more correction but good buying support on dips will limit the loss.

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

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