Commodity Analysis

Cotton prices to remain strong

Prerna Sharma Singh | Updated on March 31, 2019 Published on March 31, 2019

The commodity has been a consistent performer for the past couple of years, and is expected to retain its firmness even in 2019

The future prices of cotton surged from a low of ₹19,970/bale in February to the high of ₹21,360/bale in March, mainly due to reports of an unexpected drop in output estimates and encouraging demand from China. The commodity has been a consistent performer for the past couple of years, and as things stand today, it is expected to retain its firmness even in 2019, though with limited gains. However, the downside risks of a good monsoon bettering the crop’s prospects, a stronger rupee and the expectation of China buying more cotton from the US may restrict the gain.

Worsening supply

The drought-like condition prevailing in key cotton-growing regions and pest attacks have raised concerns about actual output, and many expect India to produce a decade-low output. Scanty rainfall in September coupled with a dry October prompted farmers to uproot half of their planted crops after second pickings due to stunted growth of cotton balls and to avoid pink bollworm attack. Generally, the growers carry out four to five pickings in a cotton crop.

As a result, the Cotton Association of India (CAI) in its last committee meeting held on March 1 further lowered the output estimates for the current season to 32.8 million bales, down 10.13 per cent from last year. CAI has been continuously trimming its projections every month since October 2018. It estimates effective supply for the season at 38.3 million bales against the demand of 36.6 million bales, leaving the closing stock by September 30 at 1.7 million tonnes — a 40 per cent disappearance of stock over 2018 — clearly indicating a tight supply. The government’s figures are even more pessimistic at close to 30 million bales.

Despite unfavourable weather this season, there has been only a marginal reduction in acreage, due to a significant hike of 26 per cent in the minimum support price. Till February-end, more than two-thirds of the total estimated crop size had already arrived in the domestic market. Before prices witnessed an upside in March, the increasing arrivals, poor off-take by mills, sluggish export demand and weak global cues had led to a correction in prices. MCX future prices touched a 10-month low in February. However, aggressive buying by the government, amounting to 1.16 million bales, provided support to the falling cotton prices.

Apart from the government’s supporting efforts, a revival in export demand from China boosted market sentiments, which had been impacted after India halted exports to Pakistan following the Pulwama attack. India has already shipped 600,000 bales of cotton to China since the start of the season and has further contracted 800,000 bales to be exported in the coming months due to a jump in the prices at local markets in China. However, tight domestic supply, robust prices and an appreciating rupee are likely to limit the export numbers down by 28 per cent compared with 2017-18.

On the other hand, the international market has shown a renewed strength in cotton prices this month on account of easing China-US trade tensions. However, the latest USDA report forecasts an increase in global harvest of cotton to 118.9 million tonnes with most of the rise coming from the US and Brazil. Global consumption is expected to continue growing but at a slightly lower rate. This may restrict any sharp gains.

According to USDA, the world trade in cotton is expected to expand, and much of that increase is expected to come from China.

China has not bought any US cotton this year, but low prices of US cotton and an anticipated conciliation in the US-China trade tiff are expected to bring positive sentiments in the international market. However, a deteriorating macroeconomic situation may cap the demand for cotton.

Outlook

Cotton prices are expected to remain firm on account of tightening domestic supply due to expectations of a significant drop in harvests, lower stocks and firmer demand. However, as always, weather will remain a watch factor — normal monsoon as predicted by the IMD subject to a weak El Nino effect may substantially correct cotton prices.

The writer is co-founder, Director and Head of Agriculture, Food and Retail at Indonomics Consulting

Published on March 31, 2019

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