There is a downside pressure on futures contract of kapas (cotton seed). Concerns over global economic growth and the recent US Department of Agriculture (USDA) report that pointed to a record-high inventory in cotton for 2012-13 are weighing on sentiments.

Over the last week, the price of futures contract of Kapas February 2013 contract on the NCDEX corrected 10 per cent to Rs 996/maund (of 20 kg). With lot of regulatory action in the last one year, we give a brief recap on the cotton market and point out the drivers for price of cotton futures from here:

What influenced price?

In March 2011, price of kapas futures contract touched a peak of 1,226/maund rising from around Rs 800 in end-December 2010. But prices started to slide from March as demand dried up. Demand from spinners dropped as their profit margins slipped with yarn prices sliding. On export front too there was no big order with exporters having already exhausted the government set limits for export. Kapas futures price touched a low of Rs 652/maund in July 2011.

Prices started reviving in the later half of July as festival demand for yarn saw spinners back in the market. As the government removed the cap on cotton exports and placed it under the open general license and as the output estimates for the new crop season of 2011-12 also came at levels higher than 2010-11, export demand revived.

In the first month of 2012, kapas futures price peaked to Rs 1,004/maund. This attracted the attention of the Government and it declared a ban on cotton exports in the first week of March. Cotton futures price slid. In March it touched a low of Rs 763.

The government, however, reviewed its decision soon and lifted the ban with the condition that only exporters who have already been issued licenses will be permitted to export. Sentiments in the cotton market started improving. On April 30, the government gave a green flag and issued fresh licenses for export. Price in the futures market peaked to Rs 1,112/maund on May 4. However, as the announcement of a cap on exports came last week, cotton prices in the spot market as well as the futures market took a U-turn.

Outlook: Price of futures contract of Kapas is under pressure on restricted exports and a negative outlook on the global economy. The Chinese demand for cotton has been dropping over the last few months and there is weakness in global textile demand as well. Price of cotton futures in the ICE Futures US exchange has dropped eight per cent in the last one week and down 14 per cent so far for the year.

The recent USDA report has stated that in the current cotton crop season, the estimated global surplus of production over consumption is 6-7 million bales which will see inventory of the season at a record high of 73.75 million tonnes (10 per cent higher over last year). This might put pressure on cotton prices in the near term. Mr D.K. Aggarwal, CMD, SMC Investments, is of the opinion that cotton futures prices may head towards Rs 920/maund levels in the short term. The upside can be restricted to Rs 1,050, he adds.

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