The Hindu Business Line : World cotton prices may decline on higher output

INCREASED area, production, consumption and end-stocks, but lower volume of trade and weakening prices are forecast for the world cotton market in 2004-05. In particular, China is heading for a significant rebound in production, which is expected to result in smaller imports into the country.

Reflecting the emerging market fundamentals, world cotton prices have moved down sharply. The New York December 2004 futures price for cotton is now below 48 cents per pound down from 65 cents/lb in late April. In June, the Cotlook A-Index averaged 65.09 cents/lb, down 4.95 cents from May average. In New York, the nearby July futures contract settlement price decreased 12.94 cents between the end of May and end of June, closing at 48.25 cents per pound on June 30.

However, there is considerable time left before the next crop is harvested and brought to the market. Across the world, and especially in major origins such as China, USA and India, the weather holds the key to higher production. The sentiment can potentially undergo a change if weather-related concerns develop.

Assuming normal weather, world cotton output will rise 11.5 per cent to a new high of 22.8 million tonnes (mt) in 2004-05, the US Department of Agriculture (USDA) has forecast. China's production is set to expand by a third to set a new record at 6.53 mt.

World consumption, on the other hand, will rise by a modest 1.8 per cent to 21.81 mt, encouraged mainly by higher use in China (7.4 mt), India (2.96 mt) and Pakistan (2.15 mt). Improved global economic outlook is positive for cotton consumption.

As consumption is expected to trail production, ending stocks are likely to rise 14.7 per cent to 8.23 mt(7.17 mt), while world imports are set to decline in 2004-05 by 8.2 per cent to 6.74 mt (7.35 mt), with China 's import requirement set for a steep fall - 34.7 per cent to 1.25 mt (1.92 mt).

For India, USDA has forecast cotton production of 2.72 mt for 2004-05, lower than previous year's high of 2.87 mt. But a long dry spell since end-June may hurt yields in areas already planted. At this point of time, the high level of optimism among traders till four weeks ago has given way to concern about crop size, quality and prices.

In 2003-04, India's cotton output was in excess of 170 lakh bales, a level from which next season's output could fall considerably short.

Higher output and price spurt since October 2003 helped India export nearly 10 lakh bales.

In the ensuing season, falling international prices may retard export efforts, and encourage larger imports into the country. Policymakers have to monitor market conditions to ensure cotton growers here are not unduly hurt.