The Hindu Business Line : Global cotton prices may scale higher

Not unexpectedly, cotton prices have begun to rise. The Cotlook A-Index has increased significantly since mid-May 2007. World’s largest cotton producer, consumer and importer, China saw domestic prices increase in June due to tighter supplies and increased demand in the domestic market.

A continued increase in Chinese domestic prices could result in sales of reserve stocks by the China National Cotton Reserve Corporation and/or increased cotton imports, reports International Cotton Advisory Committee (ICAC), which has projected season-average Cotlook A-Index at 65 cents a pound for next year (2007-08) from the current year’s 11-month average of 58 cents a pound.

History shows that when Cotlook A-Index averages higher over a season, the potential for the price to spike considerably well over the average is very real. With average price projected at 65 cents a pound, there is the possibility that the market could reach over 70 cents a pound and even higher, say 80 cents, albeit for a brief while.

Rising prices

On current reckoning, therefore, the theme for the world cotton market is rising prices in the coming months. The US cotton output is likely to be lower as acreage has shifted to more remunerative corn (maize).

The market fundamentals are becoming clear. In 2007-08, world cotton production is forecast to marginally dip to 25.3 million tonnes (mt) from 25.7 mt, while world consumption is expected to rise to a new high of 26.9 mt from 26.2 mt in 2006-07. Mill use is set to rise by 4 per cent in the Asia region, especially in China, India, Pakistan and Bangladesh, while the rest of the world will use 2 per cent less.

With production trailing consumption for the second successive year, stock drawdown is inevitable. While ending stocks for the current year are an estimated 12.2 mt, they would decline by 13 per cent to a recent low of 10.6 mt by the end of 2007-08.

Tightening global supplies and voracious consumption appetite in China are expected to boost world cotton trade by about 11 per cent to 9.1 mt (8.2 mt).

Excellent opportunity

The emerging world cotton situation of tight supplies and rising prices provides an excellent opportunity for India to benefit from. A cotton crop of anything above 270 lakh bales (170 kg each), would throw up considerable export surplus. Weather permitting, it is not beyond reach. Area under Bt. Cotton is likely to reach 50 per cent of the total. Cotton growers would benefit from firm global prices.

On current reckoning and subject to quality, India should target export of not less than 40 lakh bales season beginning October. The trade must focus on marketing efforts and take care to avoid unfair competition and under-cutting of export prices that often proves self-defeating.

A firm rupee would no doubt blunt the competitive edge; yet, with improved supply chain and planned logistics, India’s export efforts could succeed. China, obviously, would be a target market. It may even be worth exploring long-term supply tie-up with China.