The Hindu Business Line : Record cotton output hopes putting pressure on prices

WITH the start of a new season for cotton just a couple of months away, anticipated record production and higher end-stocks for 2004-05 are beginning to impact the world cotton market. Cotton prices are under downward pressure, much to the relief of consumers.

June saw international cotton prices decline with Cotlook A-Index falling to a recent low of 61 cents a pound as marketmen began to take cognisance of the emerging demand-supply dynamics.

High prices since October-November 2003 have encouraged expansion in planted area. World cotton area for 2004-05 is estimated at 34.5 million hectares, up 8 per cent from the previous year and the highest since 1995-96, according to the Washington-based International Cotton Advisory Committee (ICAC).

Favourable weather in major producing countries in the northern hemisphere — the US, China, India — is widely expected to result in a near-record world yield, leading to production of 22.22 million tonnes (mt), a new high.

Output in 2003-04 was 20.37 mt.Interestingly, two-third of the incremental production in the ensuing year is expected to occur in China, world's largest producer and consumer of cotton.In 2004-05, world consumption too is projected to reach a new high of 21.4 mt as compared with 21.1 mt in the previous year. High prices of the last several months resulted in a near stagnation in cotton consumption. Softer rates next season will spur consumption growth.

The growing world economy and declining prices will sustain cotton consumption in 2004-05, while mill consumption is forecast to increase by 0.3 mt , ICAC said .

Market fundamentals suggest that the season-average Cotlook A-Index will decline to 62 cents a pound in 2004-05, 8 cents less than the expected average for this season.The season-average A-Index is forecast to drop further in 2005-06 to 56 cents a pound in the wake of a further increase in production and still higher end-stocks, according to ICAC.

The outlook for cotton production in India is favourable. High prices last season — caused by a spurt in international rates and exports — have no doubt provided sufficient motivation to growers here.

It is unclear at this point in time whether the country would harvest a crop as large as in the previous year, that is 170 lakh bales and how the quality would turn out to be. Higher world production and declining global prices are sure to have an impact at the farmgate level and price realization for Indian farmers. There is also likely to be some pressure on the domestic market from low-pricedimports.