Cotton could bloom on Chinese demand

Since the start of this year, cotton prices have recovered their earlier losses on demand from the top consumer, China, and hopes of a drop in acreage in the world’s third-largest producer, United States.

MCX Cotton futures have gained almost 19 per cent taking prices to their highest level in more than a year. Preceding the recent surge, cotton prices posted back to back losses for two years as cheaper synthetic alternatives battered the fibre demand and on a global glut.   

Lower acreage

Easing demand and fragile prices of cotton has led to many US farmers shifting to more remunerative crops, leading to a lower acreage. According to the USDA forecast, the acreage in cotton would drop by 19 per cent to 4.1 million hectares this season. Escalating fears of delay in planting due to heavy rains in the major growing areas in the country and recent upbeat economic releases are likely to support prices.

China, India and US are the major players in the cotton market and usually the demand-supply situation is the key factor behind the price fluctuations. China is the key market driver being the top consumer, producer and importer of the commodity. China produces 27 per cent of the total global production and consumes almost 40 per cent of the world offtake. Also, China accounts for almost 38 per cent.

China has been purchasing and stockpiling domestic cotton to boost the country’s output and importing to meet textile companies’ demand. The country bought 5.14 million tonnes of cotton from the global market in 2012.

China started stock-building programme in 2011, providing more than global prices to support domestic farmers that created a tightening global supply outside China and this action supported prices and pushed it higher during the first quarter of this year.

According to the China Cotton Association, the country will pursue the policy of purchasing and stockpiling domestic cotton to urge farmers to produce more cotton. To meet domestic demand, the Chinese government issued import quotas.

Another hot name among the international participants is India as it is the second largest producer of cotton and exports a significant part. According to the USDA report, India’s cotton output in the new marketing year beginning October is seen at 34.5 million bales.

Cotton sowing begins in April and continues till September. India accounts for about a third of the global cotton area.

According to the Cotton Advisory Board, the country had a surplus of 8 million bales after exporting a record 12.95 million bales last year.

surge in domestic production

In the past 10 years, Indian cotton production has surged 153 per cent due to high yield after the introduction of genetically modified seed called Bt cotton in 2002-03 which made it a next exporter.

Looking forward, the outlook of cotton is not too gloomy. Despite a forecast of record supplies by the end of this crop year, prices could possibly trade in a range of Rs 17,200-19,500/bale levels on the MCX.

Major rallies are anticipated only on a close above Rs 20,000/bale levels.

(The author is Whole Time Director, Geojit Comtrade Ltd. The views are personal.)

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