Derivatives

Bright prospects for cotton prices

Rajalakshmi Nirmal | Updated on November 15, 2020 Published on November 15, 2020

Domestic consumption expected to be strong in 2020-21; supply is likely to drop

The Cotton Association of India (CAI) has released the crop estimate for 2020-21 (October- September) and put it at 356 lakh bales (of 170 kgs each), down by 4 lakh bales from the previous year’s crop of 360 lakh bales. Besides, the CAI has increased the estimated domestic consumption and export numbers. The carry-over stock, thus, is likely to be sharply lower than previous year’s.

The improved demand, plus the crop damage in key States including Telangana and Maharashtra, is likely to keep prices strong in the near term. The Intercontinental Exchange (ICE) cotton #2 futures contract, the international benchmark for cotton, trades at 70-72 cents/pound, up from 66 cents in September. The sharp rally in last two months is thanks to weak dollar, improved global demand and lower cotton output and inventories in the US.

Demand strong

There is a significant improvement in demand outlook for cotton. The CAI estimates that domestic consumption will be 330 lakh bales in 2020-21 versus 250 lakh bales in 2019-20, driven by a strong demand revival in the domestic and export market. Exports are expected at 60 lakh bales, up from 50 lakh bales of last year, thanks to demand in the international market for Indian cotton as other major global players are likely to see a decline in output. It needs to be noted that the dragon country finished its cotton reserve sales on September 30, and supplies have tightened in the market.

Paritosh Aggarwal, MD, Suryalakshmi Cotton Mills, Maharashtra said, “Export demand is strong. There is buying by customers from Bangladesh and China that’s keeping cotton prices up”.

Raveendran, MD of Thenpandian Spinning Mills, Gobichettipalayam, Tamil Nadu, said, “Textile demand has recovered to pre-Covid levels. There are orders from both domestic and export market. Actually, Indian cotton at ₹ 41000/candy is the cheapest in the world market now.”

Manoj, MD of Salona Cotspin of Coimbatore, Tamil Nadu, said, “There is a strong demand for Indian yarn in the global market as many buyers want to avoid Chinese products. So, players from Bangladesh, Indonesia, Vietnam and Sri Lanka are buying India yarn to make garments and export.”

Global apparel imports which dropped sharply in April-May due to the Covid-19-led lockdown has recovered dramatically, says the USDA report.

However, one needs to be cautious as demand is stoked by the deferred purchases and it may not sustain, adds the report. In the domestic market, currently, spinners are procuring in bulk because they have exhausted their stock, so, only over next two-three months it can be known if demand will sustain.

Price outlook

Indian cotton is cheapest in the world (MCX Cotton futures trades at 6-7 per cent discount at present from Cotlook A index) right now. This will help Indian exporters see good orders.

What is also likely to be positive for prices up, besides the strong demand, is drop in supplies. The extensive crop damage in Maharashtra, Andhra Pradesh and Telangana due to excess rains may keep a check on supplies in the current year. In Vidarbha, besides the bollworm attack, there is also rotting of bolls due to moisture which can affect cotton yield. It needs mention here that to start with itself there was a drop in area under cotton this year by 2 per cent as some farmers shifted to other crops such as groundnut as prices of cotton were not lucrative.

That said, there is going to be enough stock to meet out demand from the market. The current year began with an opening stock of 107.5 lakh bales. So, a drop in crop output by 1 per cent, as expected by CAI, or even a little more is not going to make it a challenge to feed demand. The CAI estimates the closing stock for the current year at 87.5 lakh bales. In mandis, cotton prices are now ruling at ₹5,725/quintal which is lower than MSP of ₹5,825/quintal, but still higher than last year’s ₹5,040/quintal. However, given that CCI procurement is set to increase post-Diwali, market prices will remain firm.

The outlook for cotton in the short to medium term is thus positive. With world cotton output set to decline in the current year and demand reviving, prices will remain supported in the near-to-medium term.

The CCI is procuring at good pace across the country and has set a target of 125 lakh bales versus last year’s 105.14 lakh bales now.

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Published on November 15, 2020
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