Thanks to a rebound in world agricultural output in the northern hemisphere, there has been a sharp downturn in commodity prices in recent months. Falling crude oil prices and strengthening dollar have accelerated the price fall. Cotton has been no exception, given the evolving market fundamentals for 2014-15.

For the third year in a row, world cotton production will exceed consumption. So cotton stocks are set to reach new highs with a concomitant impact on prices. Indeed, both supply side and demand side factors are at work for the natural fibre often called white gold.

While world consumption will trail production, the key to market direction is the volume of trade and ending stocks. Global trade volumes are seen shrinking in 2014-15 by one million tonnes. This is expected to result in closing stocks of 21.4 million tonnes for the current year versus 19.7 million tonnes last year.

China conundrum

China, the world’s largest cotton producer, importer and consumer has been a critical factor in driving the world cotton market. In recent years, the Asian major built up huge reserves of cotton to meet its domestic needs. But this is changing.

For the past three years, China’s cotton support programme has lifted global cotton prices. However, China’s shift from a price support to an income support policy has caused abrupt fall in world prices. The A-Index dipped below 70 cents in early October, a level not seen in five years, according to the US Department of Agriculture.

So China is unlikely to be an aggressive buyer this year. In fact, its imports could decline by a third to two million tonnes. This factor, together with continued growth concerns in other developed economies such as Europe and Japan, are sure to impact market sentiment.

Surplus stocks and falling trade will also hasten the exit of speculative capital, which will put further downward pressure on prices. Also playing a role is the US dollar.

So, a combination of demand trailing supply, weak trade outlook, large inventory build-up and stronger dollar means that the upside to world cotton prices is nearly absent. While consumers would welcome low prices, it is important to realise that commodity market prices seldom remain in steady state.

Low prices discourage producers and the impact will be seen the following year. In 2015-16, one can safely expect a supply response to current prices. Production cutbacks will come from growers spending less money on crop care and agronomy given the lower than anticipated returns. If the weather plays truant, the potential tightness would be exacerbated. So, consumers should brace themselves for higher prices next year.

Indian scene

According to preliminary estimates, India has produced a record cotton crop (40 million bales), displacing China as the number one producer. But this has come at a time when export markets are not exactly favourable. Cotton export volumes will surely be hit and domestic prices risk a fall.

World cotton prices are currently below India’s minimum support price. The risk of slowing export demand would mean there will be sizeable domestic purchases and stocking of cotton under the support programme. One factor that can help export parity is the currency. If the rupee were to weaken from its current levels, it may help promote exports.

comment COMMENT NOW