Cotton prices may continue to rally in the coming quarters and are likely to cool-off in the second half of 2022, while palm oil prices are expected to hit new highs on robust demand and tight supplies in the new year, commodity analyst T Gnanasekar, Director, Commtrendz Research, said on Thursday.

Addressing a webinar on Commodities Market Outlook 2022, organised by Business Line , Gnanasekar said cotton, after making decade highs, has been caught in the range at this point in time. On the Intercontinental Exchange (ICE), the benchmark for cotton prices globally, cotton tested $1.20 per pound recently and is now consolidating, taking a breather at this point in time.

“With the sort of economic recovery we are seeing and the post Covid demand with online business picking up for garments, there is a tremendous scope for prices to rise. In fact, crude oil prices are also impacting prices in a big way because polyester prices are determined by how crude oil prices move. So, if crude oil continues to rise, there is a good chance for the market to move to natural fibres and that will drive cotton prices even higher,” he said.

Presenting the technical view, Gnanasekar said there’s more upside in the coming quarters and this $1 per pound will be “very stable”. “We would see much higher prices going forward. Prices are somewhere around $1.10 right now and there’s some way to go. Technically the target is $1.4 per pound for 2022 for cotton is concerned,” he said.

Citing the CFTC’s recent Commitments of Traders (COT) Report, Gnanasekar said the market is expecting prices to come down in March 2022. Textile mills have taken a view that by March prices will start coming down because of arrivals and various other factors, he said.

In the domestic market, cotton prices made a new high in India at ₹34,000 per bale (170 kg) recently and corrected to ₹30,000 levels. “I think they are now headed closer to ₹34,000-35,000 levels or even beyond that. Eventually in the second half of 2022, prices will come down to below ₹30,000 somewhere around ₹28,000 and settle down. Farmers will have more incentive to produce more cotton going forward,” Gnanasekar said.

Recalling the all-time high price of $2 per pound witnessed during March 2011, Gnanasekar said such exaggerated moves had resulted in sharp retracement and that’s what the industry has to watch out for. “It is better to plan hedging strategies as prices rise because all the mills and buyers will be left with high priced inventories. Hedging strategies are going to be the key thing to manage well the cash flow and profitability,” he said.

Palm oil turns hot

Presenting his views on the edible oil market, Gnanasekar said through palm oil is not preferred during winters, prices are still somewhere near all-time highs. “It has corrected recently, but fundamentals are extremely intact. High prices are supposed to result in lower demand, but that’s exactly not we have seen in many of the commodities. The conventional demand supply factors are simply not at play at this point in time. I think one of the reasons is the stimulus. With lot of money chasing the commodities, it doesn’t matter what fundamentals are as long as funds are making money. But that might come to an end with Fed starting to increase the rates going forward. We might not see that kind of speculative activity that we saw in the previous years. It could be much more balanced. Market will slowly start to fall into the supply-demand dynamics in 2022. That’s my personal expectation,” he said.

Palm oil made a new high in 2021 and hit Malaysian Ringitt (MYR) 5250, due to tight supplies and extremely robust demand post Covid. “Our own price forecast is that it would come down to MYR 4,000 levels and find support there. Chinese New Year demand is going to be very strong. A lot of these factors are in play as far as edible oil market is concerned. We think new highs are the norm for 2022 also. We are looking at MYR 5,500 at least in the coming year,” he said.

In the domestic markets, palm oil on MCX is ruling around ₹1,050. “I think it should stabilise around ₹1,000 and start moving back towards 1,250-1,300 levels. Right now, we are in that right phase of consolidation and we expect prices to go up,” Gnanasekar said adding that the price rise has affected the overall spectrum of consumers.

High volatility

Kapil Dev, Chief Business Officer, NCDEX, said price volatility has increased across commodities in the recent past as markets have turned more riskier due to the global events such as Covid-19 and Suez Canal blockage among others. The annualised volatility in key commodities has seen an increase in recent years and in case of soyabean it was close to 50 per cent. Such increased volatility creates risks and impacts the inventory management.

Dev said a better risk management policy has to be in place in these kind of situation for capital protection and optimisation, better efficiency planning while providing stability to cash flows.

“Commodity outlook itself cannot ensure the profitability of the enterprise. Price risk management is important to safeguard the profitability of the enterprise due to unforeseen events,” Dev said.

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