Seed cotton futures gain with New York but upside may not last long

The broad fundamental factors for cotton indicate a downtrend in prices but kapas (seed cotton) futures on domestic exchanges have been heading upwards for the past two weeks, tracking gains in New York cotton futures and on technical support.

But the upside is unlikely to last for long as supplies are likely to be ample amid sluggish demand, analysts and traders said.

Kapas futures for April delivery on National Commodity and Derivatives Exchange and MCX have gained about 25 per cent in the last one month.

But they were down on Tuesday by over 1 per cent. NCDEX April Kapas was quoted in the range of Rs 878-911 for 20 kg.

Technical buying has been supporting cotton futures on ICE, analysts said.

After touching a low of 82 cents a pound on ICE, cotton futures have been heading upwards.

“Fundamentals are bearish but cotton prices have been going up. Benchmark ICE cotton saw a nice breakout at 92 cents and is heading towards 100 cents,” said Mr Dharmesh Bhatia, Associate Vice-President – research, Kotak Commodities.

He expects the contract to touch 117 cents where some resistance could emerge but added that the current uptrend is not supported by volumes.

The uptrend is primarily because investors are covering their short positions.

Domestic kapas futures also headed upwards once it broke a strong resistance of Rs 740 for 20 kg, Mr Pranav Mer, Research Analyst, Mangal Keshav Commodities said.

Kapas futures are expected to continue gaining for the next 7-8 sessions but a downturn is imminent as arrivals pick up, said Ms Vedika Narvekar, Senior Research Analyst, Angel Commodities Broking Pvt Ltd.

ARRIVALS

Cotton arrivals for the season that commenced on October 1 have been lagging behind previous season mainly because farmers are awaiting some improvement in prices and a possible hike in minimum support prices by the Government.

While the current uptrend in kapas futures offers good opportunity for speculators, hedgers and long-term buyers should stay away.

“At Rs 1,000 level kapas futures offers an ideal level to go short,” Mr Bhatia said.

Spot prices of cotton have also been moving up on fears of shortfall in the current crop.

But the shortfall in cotton crop for the 2011-12 (October-September) season is unlikely to be huge, says Mr Shirish Shah, Partner, Bhaidas Cursondas & Company.

India's cotton output for the current season is estimated at 356 lakh bales (one bale is 170 kg each) by Cotton Advisory Board, at 361 lakh bales by Ministry of Agriculture and at 342.5 lakh bales by US Department of Agriculture.

Recent purchases by mills and exporters have also contributed to the gain in prices.

But their purchases may cease if prices continue to rise, Mr Shah said. Tuesday's fall in cotton prices is possibly because of buying resistance at higher levels, he said.

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