Storm after calm in cotton market as prices gain on lower US crop

Subramani Ra Mancombu | | Updated on: Aug 17, 2022
In India, cotton futures expiring on August 30 topped ₹50,000 a bale of 170 kg on Wednesday

In India, cotton futures expiring on August 30 topped ₹50,000 a bale of 170 kg on Wednesday

Spot prices near ₹1 lakh a candy

Cotton prices are heading higher again in the global market after the International Cotton Advisory Comittee (ICAC) and the US Department of Agriculture (USDA) estimated a drop in production next season starting October.

The estimates have driven the natural fibre prices by 14 per cent in the past week. Benchmark cotton futures on New York’s Intercontinental Exchange surged to as high as 125 US cents a pound on Tuesday before settling lower at 121 cents (₹76.050 a candy of 356 kg).

In India, cotton futures expiring on August 30 topped ₹50,000 a bale of 170 kg on Wednesday and were last traded at ₹50,500 (₹1.02 lakh/candy). October futures increased to ₹42,400 a bale (₹88,790) and November contracts at ₹38,850 (₹81,356).

Uncertain future

In the spot market, Shankar-6 cotton, the benchmark for exports, is offered at ₹98,500-98,000 a candy. Across the country, about 668 tonnes of raw cotton arrived on Tuesday and the net weighted average modal price (the rate at which most trades take place) was ₹10,582 a quintal. This is against the minimum support price (MSP) of ₹5,726 a quintal this season.  

The ICAC said the global market had witnessed “a brief calm period for two months” and those days were over. “The market is seeing an uncertain future over the next few months,” it said.

The committee attributed two reasons for the current situation. The first is the collapse of the cotton crop in West Texas, the largest producer of fibre in the US. Drought has promoted growers to abandon all non-irrigated cotton, while they have begun to shelve irrigated cotton too, it said. 

The second reason was jittery speculators and investment firms, worried over a global recession, were driving prices down. The fear was wreaking havoc in cotton markets, it said. 

Drought impact

The USDA said global cotton production will be lower by 3.1 million US bales (217 kg) in view of the crop in the US being affected. In turn, it estimated a drop in global trade by 1.8 million bales led by a 2.0-million-bale reduction in US exports.  

“(US) Production in 2022-23 is forecast to fall roughly 5 million bales to 12.6 million because of drought, particularly in Texas which normally accounts for more than one-half of US plantings,” the USDA said. 

Prabhu Dhamodharan, Convenor of Coimbatore-based Indian Texpreneurs Federation, said the current rally in ICE cotton based on the USDA outlook on Cotton World Markets and Trade might not sustain in the medium term. “Any shortage in the US crop will be compensated by higher crop in India, China and Turkey,” he said. 

Texas acreage cut

His views are in line with the ICAC. The committee said, “It’s possible the deficit could be mitigated by good crops in the world’s other top-producing countries but there’s no guarantee that will happen.”

Major General OP Gulia, CEO, SVP Global Textiles Ltd, said cotton prices saw a correction in the first week of August and “when it was looking that they are stabilising in view of new crop arrivals, there was a sudden rise in last one week”.

“The sudden spurt saw ICE December futures gain 12.46 cents last week and another 9 cents on August 15 and 16. The WASDE report stated that there is an abandonment of almost 43 per cent of cotton by farmers in the southwestern region due to severe drought. This reduced the acreage from 12.48 million to 7.13 million acres,” he said. 

Anand Popat, a Rajkot-based cotton, yarn and cotton waste trader, said cotton prices in the spot market will likely rule firm until the arrival of the new crop. 

“Cotton inventory is low in the market at the moment. The upswing or downswing in cotton price is purely speculative,” said Ronak Chiripal, CEO, Nandan Terry Pvt Ltd.

Weak fashion retain scenario

“Prices may not decline much in the near-term since cotton production is lower and demand is stabilising,” he said but cautioned that higher prices could lead to demand destruction. 

Dhamodharan said USDA’s projection of a minor contraction in cotton usage is not in line with the current weaker scenario in fashion retail. “Demand contraction in the current economic climate seen across markets will also reduce the cotton consumption more than the USDA estimates. So this short-term rally will not sustain in the medium term,” he said.

Though the area under cotton has increased by five per cent this year, Gulia said the crop is under water in some areas of Maharashtra, Telangana, Gujarat and Madhya Pradesh due to heavy rains. “There is a fear of low yield due to heavy and unseasonal rains and a possible crisis of pink bollworm. Due to low yield, the supply-demand gap is likely to continue,” he said.

Chiripal said the overall demand for cotton globally is less. “Prices are expected to stabilize with the availability of the new crop by the end of September or fist week of October,” he said.

ICAC suspends price projections

“The continuous stress may force mill owners to scale down production or shift to man-made fibres which will have an adverse impact on employment and exports,” the SVP Global Textiles CEO said. 

The USDA has also cut the import of cotton by India by 2.5 lakh bales to around 19 lakh bales next season. It has estimated next season’s exports at 49 lakh bales, while the output has been pegged at 352 lakh bales. 

Meanwhile, the high volatility in cotton prices has resulted in the ICAC suspending its price projections. It said it will re-evaluate the price situation in September and determine if it should resume the price projection forecast. 

Published on August 17, 2022
COMMENTS
This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you