Commodity Analysis

How sustainable is the cotton rally?

Rajalakshmi Nirmal | Updated on September 27, 2020 Published on September 27, 2020

Current high prices may not hold for long as mounting stock levels and lacklustre domestic demand may exert pressure on rates

The price of cotton, one of the most-traded agri commodities on exchanges, and an important gauge of economic activities, has gone up in the last two months.

This is thanks to the positive sentiment that emerged in the aftermath of crop destruction in the US caused by hurricane Sally.

The USDA’s downward revision of global cotton output, too, added to the sentiment.

The ICE (Intercontinental Exchange) Futures Cotton #2 contract, a global benchmark for cotton, is trading at 66 cents per lb, up from 60 cents in July. The price per candy in the domestic market (of Shanker-6 variety) has rallied up, too; in Rajkot, the price per candy is ₹35,000, up from ₹32,000 in July, as traders absorbed the stocks in the market by buying from CCI (Cotton Corporation of India).

That said, demand is not very strong. In India, cotton consumption has dropped by about 20 per cent over the last year due to a drop in demand from spinning mills. Output in 2019-20 season (October-September) is estimated to be higher by at least 42 lakh bales. Hence, there is excess supply. Caution is advised for cotton traders here on.

Excess supply

Given the lockdown and restrictions on movement, demand for textiles, and thus demand for cotton from spinning mills, has been lower this year.

In the 2018-19 (October-September) season, the total domestic consumption of cotton was 312 lakh bales, but in the current year, the estimate of the Cotton Association of India (CAI) is 250 lakh bales.

Exports have improved (till July 31, it was 43lakh bales) and likely to finish the year at 50 lakh bales (as per the CAI estimate), up 8 lakh bales from last year.

It isn’t, however, going to make up for the loss of 62 lakh bales in domestic consumption (250 lakh bales vs 312 lakh bales).

Thus, the 2019-20 cotton season is likely to end with a closing stock of 103 lakh bales, which is up from the initial estimates of 45-50 lakh bales.

A USDA report released early this month indicated a small drop in the closing stock of cotton for 2020-21 — from 104.91 million bales to 103.81 million bales. It is still the highest since 2014-15.

The dispute between the USDA and the CAI over India’s cotton closing stock for 2019-20 (August-July) has not been sorted out.

Though the USDA in its recent report revised downwards India’s closing stock estimates from 19.2 million US bales to 17.86 million US bales for 2019-20 (August-July), it is still higher than the estimates of CAI at 11.2 million US bales.

However, the move by USDA to correct the closing stock numbers by about 2 million US bales has kindled positive sentiment in the Indian market in the last two weeks and helped prices.

That said, investors and traders need to be cautious here on as new crop arrivals are set to begin. According to the data of the Ministry of Agriculture (issued on September 18), the cotton acreage in the kharif season reached about 129.47 lakh hectares compared with 127.09 lakh hectares last year, with Telangana, Karnataka, Punjab and Haryana reporting higher areas.

While CAI’s estimate of output is about 354.5 lakh bales, market estimates are around 380 lakh bales. This is despite a drop in acreage in Gujarat.

Procurement

In 2019-20, the CCI procured about 107 lakh bales, probably the highest ever in a year since it started procurement operation.

It was apprehended that CCI might not be able to sell the stock, but the corporation succeeded by offering price discounts. It sold about 50 lakh bales in the last few months.

Now, there is space available with CCI to procure the current season’s crops. But one has to wait and watch as to when the CCI will start the procurement and lift prices.

Outlook

Cotton price may remain soft for the next three months. Fresh arrivals may start by mid-October, and chances are that prices may come under pressure because of higher market supplies and poor quality of cotton in the first few weeks as farmers bring in the fibre with high moisture.

Factors to watch out are the rupee-dollar exchange rate, the global cotton prices and physical market demand.

If international prices remain at 65-70 cents per pound and exchange rate is around 73-74, cotton exports from India will continue to be good. That said, there is no trigger for prices to move higher immediately.

On the demand front, many spinning mills are still functioning only at 60-70 per cent capacity utilisation because of labour shortage, and don’t see labourers returning before Diwali. While there is some damage to cotton crops in Maharashtra because of rain, overall, the khariff output is likely to be higher. So, the market will continue to remain over-supplied in the short to medium term (next six months).

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Published on September 27, 2020
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