Cotton has been a consistent performer in the domestic market for the past couple of years in contrast to the global markets. 2019 has not been an exception.

It has found support on decade-low output expectations in the 2018-19 season and a strong export demand following the US-China tension.

However, the fibre has been on a patchy ride since May on extremely bearish global cues (bumper crops in Brazil and the US), and domestically, on forecast of a record harvest, sluggish exports and cheaper imports.

Going forward, cotton prices can find support and trade firm on account of delayed arrivals, depleting stocks, concerns over crop quality, procurement support from the Centre and expectations of improved buying from China.

Cotton statistics

Relatively higher prices in 2018-19, hikes in support prices and delayed monsoon have influenced farmers to increase the acreage under this weather-resilient crop.

As per the latest report of the Agriculture Ministry, the cotton acreage has been 7 per cent up over the last year. Rough estimates suggest that India is harvesting 370 lakh bales (of 170 kg each) of the fibre — an increase of almost 20 per cent over last year’s output.

Total cotton supply, according to the Cotton Association India (CAI), for 2018-19 (October-September) is 374 lakh bales, including the opening stock of 33 lakh bales and imports of 29 lakh bales against consumption requirement of 359 lakh bales (including export estimate of 44 lakh bales).

That leaves 2019-20 with an opening stock of just 15 lakh bales.

Prices and procurement

India is likely to harvest a much better crop (at least 10-15 per cent more output) than the previous year, but lower carry-over stocks, high seed prices and demand for good quality cotton are likely to hike prices.

In a major development, the CCI has started cotton procurement in Punjab after a gap of four years and has plans to buy 10 million bales during 2019-20 in case prices fall below MSP.

Further, in an effort towards doubling the farmers’ income, the Modi government raised the MSP by over 35 per cent to ₹5,550 in the last two years.

However, global prices corrected to three-and-a-half year lows. That led to local prices giving a premium of 10-15 per cent compared to the global benchmark rates, leading to an expected drop of 36 per cent in cotton export for the 2018-19 season over 2017-18.

Even a fall in the rupee value didn’t help exports. On the downside, India’s cotton spinning and yarn industry is facing a crisis.

India’s cotton yarn exports to China have fallen more than 35 per cent in the first quarter of FY20, mainly on account of duty disadvantages to the extent of 3.5-4 per cent.

After five years of annual auctions starting 2013-14, China’s state reserve is down to 9 million bales (1 bale equals 480 pounds), which is just enough to meet consumption requirements for three months.

China is expected to go slow on sale of domestic reserves and increase its import orders in the coming months.

With the revived Sino-US trade hopes, the possibility of a partial trade deal has cropped up leading to an optimistic sentiment in the global cotton market.

If China increases its buying from the US, it may cut into India’s export prospects.

Outlook

Overall, further downside doesn’t seem likely and prices are expected to trade firm.

The writer is co-founder, director and head of agriculture, food, and retail at Indonomics Consulting

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