Why cotton prices are near 11-year high defying fundamentals

Cotton prices in the global market have increased to almost a 11-year-high on the Intercontinental Exchange (ICE), but stakeholders in the industry say the rise in natural fibre prices defies fundamentals.

According to the US Department of Agriculture (USDA), global production is likely to be higher from earlier estimates this season to June, while consumption is predicted to drop and ending stocks are set to rise.

Despite this, benchmark ICE cotton futures zoomed to 158 US cents a pound (₹96,675 a candy of 356kg) last week before dropping to 143.86 cents  (₹87,450) on Monday. Analysts and traders agree that soaring crude oil prices have also resulted in cotton prices heading north. 

‘Exuberant rally’

The US Department of Agriculture (USDA) in its “World Market and Trade Report” said, “prices on the Intercontinental Exchange have witnessed an exuberant rally, in a subtle reference to spike.” The International Cotton Advisory Committee (ICAC), an association of cotton producing, consuming and trading countries, said “it is difficult to identify a concrete reason for this price increase as fundamental supply and demand principles seem to be well balanced”. 

According to Prabhu Dhamodharan, Convenor, Indian Texpreneurs Federation (ITF), cotton has rallied in the global market largely due to trade short covering resulting from very high level of “on-call sales” in the range of 6.5 million US bales (8 million bales of 170 kg) in international markets.

“This is high compared with the average of 2.8 million bales such sales over the last few years. In no way, fundamental cotton demand is supporting the upward trend in prices,” Dhamodharan said.

Speculation driving prices

Anand Poppat, a Rajkot-based trader of cotton, yarn and cotton waste, told BusinessLine that there was too much speculation on ICE which was driving up the prices. 

The feature of the “on-call sales” is that a buyer purchases cotton from a seller or speculator without fixing the price. Some of these buyers had purchased cotton in November hoping that they could fix the prices in January. 

But prices did not drop in January, resulting in the buyers postponing the decision to fix the price for the cotton. This gave the leeway to speculators to further push up the prices.

With the season ending in June, buyers will have to settle “on-call sales” fixing a price. If they are unable to settle it in June, then they will prolong the settlement to December, sources said, adding that the speculators-buyers tussle has led to the current rally. 

Indian scenario

The buyers have to book loss and come out, they said, adding that once the settlement is done, cotton will not have any big support. Since the prices are yet to be fixed, the index has increased. 

The USDA said large quantities of unfixed sales or “on-call sales” coupled with significantly low certificated stocks had resulted in the spike in cotton prices.

Traders and other stakeholders say this is the reason for the surge in cotton prices in India too. In India, prices of Shankar-6 cotton, the benchmark for exports, were quoted at ₹97,300-700 a candy on Tuesday, up by over ₹1,000 from Monday. Raw cotton was quoted at ₹12,000 a quintal, more than double the minimum support price of ₹5,726 fixed for this year. 

Quality cotton is quoting at over ₹1,00,000 a candy, said Poppat.

Lower arrivals

Last week, Tamilnadu Spinning Mills Association (TSMA), in a letter to the Textile Commissioner, said about 90 lakh bales of cotton are yet to arrive in the market and expressed the fear that it could have been hoarded. 

But traders said there could be a lag in cotton arrivals in the South, particularly Tamil Nadu. The TSMA said while 336 lakh bales had arrived during October 2020-April 2021, but only 246 lakh bales had arrived in October 2021-April 2022. 

Poppat said arrivals were 263 lakh bales, while the Cotton Association of India has pegged it higher at around 275 lakh bales. “Probably, the production is likely to be lower than revised estimates of 340 lakh bales,” said a trade source, who did not wish to be identified.

The Committee on Cotton Production and Consumption pegged cotton production this season to September at 340.62 lakh bales against 352.48 lakh bales last season. 

Lack of quality 

The rise in cotton prices resulted in spinning mills raising yarn prices by ₹40 a kg across all varieties from May 1. This has resulted in garment and knitwear manufacturers demanding a ban on exports of cotton and cotton yarn. “Any ban on the export of cotton or its yarn will lead to a further rise in prices,” said Poppat. 

Southern India Mills Association Chairman Ravi Sam said the Centre should first call for the stock holding details of cotton by various players, except farmers. “Similarly, stock holding of yarn should also be declared by all players,” he said. 

ITF’s Dhamodharan said soaring cotton prices have led to demand destruction in cotton fashion products across all developed markets. General inflation has combined with cotton inflation, leading to the current problem. “We are witnessing rapid penetration of alternate fibres also in multiple products,” he said. 

“In the domestic market, there is a shortage of quality cotton. Though production may be estimated at 340 lakh bales, the quality of at least 10 per cent of has affected due to unseasonal rains in November-December,” said the trade source.

There is little the Government or anyone can do on the price front, the source said.

Sam said the Centre should come up with a new technology mission on cotton. “India’s cotton area makes up 39 per cent of the total acreage in the world, but in terms of production, it contributes only 23 per cent. There is immense scope to improve production,” he said. 

Bearish trend ahead

Trade sources said with the “on-call sales” likely to be settled and all fundamentals pointing to a bearish trend, cotton prices could soon head south. 

ITF’s Dhamodharan said all signals indicate a possible correction in the coming days. “At the same time, the corrections may also be gradual,” he said, adding that currently the entire manufacturing value chain is facing pain due to this uncertain and volatile environment.

Agencies such as the USDA see demand for cotton slowing on account of the Russian-Ukraine conflict. 

Poppat said with the Centre allowing cotton imports at zero duty till September 30, Indian mills could import about 25 lakh bales. The USDA has pegged imports at 14 lakh bales against 10.8 lakh bales last season. “So far, 6.5 lakh bales have been imported,” Poppat said. 

Mills are a little short of inventory and it is one of the reasons why production has slowed. “Imports will take two months to come. Once that happens, the  situation will ease,” the trade source said. 

The good prices, however, will result in higher cultivation of cotton across the globe this year, ICAC said.  

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