Cotton prices seen ruling firm next season

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Production may trail consumption drawing down ending stocks further

G. Chandrashekhar

Mumbai, April 4

Cotton market participants around the world have begun to look for advance price signals for the next season (2008-09). Production prospects in three of the world’s largest producing countries — China, India and the US — will be a key driver of the market prices in the coming months.

In the wake of continuing competition for acreage, especially in the US – cotton has to compete with major field crops such as wheat, corn and soyabean – and surge in prices of the latter, area under cotton is most likely to shrink in the upcoming planting season. This would be the third consecutive season of area decline for the fibre crop.

Cotton harvested area in the US is projected to decline by a further 15 per cent in 2008-09, the Washington-based International Cotton Advisory Committee (ICAC) said, adding that reduced cotton plantings in the US could be offset by increases in China, India, the African Franc zone, Australia and Brazil. World cotton area is projected to remain stable at 33.8 million hectares.

Fundamentals to tighten

World cotton market fundamentals are set to tighten further, with concomitant effect on world prices. In 2008-09, production is likely to trail consumption and ending stocks would be further drawn down. World cotton price is projected higher in the ensuing season.

According to ICAC, the fundamentals of cotton supply and use alone would suggest a season-average Cotlook A-Index of less than 70 cents a pound in 2007-08. However, based on trends in prices during the first eight months of the year, it is obvious actual market prices are higher.

“Increases in prices of competing crops, the increasing role of speculative activity and commodity investment funds may be affecting cotton prices in ways that are not reflected in fundamental measures of cotton supply and use,” ICAC pointed out in a report.

Price trends

As compared with an anticipated average price of 74 cents a pound for 2007-08 (assuming Cotlook A-Index fluctuates between 76 and 83 cents a pound during the rest of the season), the ICAC price model forecasts a season-average Cotlook A-Index of 80 cents a pound in 2008-09.

A study of past price trends suggests that prices move in a range – as much as 10 per cent above or below the average price. Therefore, the forecast average of 80 cents would suggest a trading range of anything between 70 cents and 90 cents a pound. In other words, prices can potentially touch as high as 90 cents a pound sometime in 2008-09 season.

Good for India

These highly anticipated global market developments are good news for India. The country has had a great season so far. With record output (310 lakh bales) and exports (60 lakh bales), it will go down as one of the finest seasons for cotton growers and traders, although mills have been rather unhappy with strong prices.

Producer-friendly prices are sure to encourage growers during planting time for the next season. There is belief, the next season would once again see firm prices and the market would open strongly, despite large output.

Talk of restricting or prohibiting cotton exports is beginning to do the rounds of the market. As the 2007-08 arrival and marketing season is all but over, imposition of an export ban at this point of time would serve little purpose.

Indian cotton mills are no doubt aggrieved over high raw material prices combined with a firming rupee. The crisis the textile industry claims to be passing through should set the industry leaders thinking. Backward integration is one way to ensure captive raw material procurement. The industry cannot afford to overlook this choice any more.

(This article was published in the Business Line print edition dated April 5, 2008)
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