Traders are also concerned about the flood-like situation that can damage the crop, which is harvested from October to February, in various parts of India.
Cotton, or kapas in Hindi, is a kharif crop sown in the monsoon season in the states of Maharashtra, Gujarat, Madhya Pradesh and Telangana and the crop is harvested from October to February.
Rajasthan, Haryana, Karnataka and Punjab are the other states that grow cotton but at a smaller scale. Sowing depends on the monsoon season and the distribution of rainfall.
Good rain is vital for yield as are remunerative prices. Higher prices are generally forecasted to encourage sowing, as a lower price can lead to farmers opting for soybean, maize and castor seed over cotton.
Raw cotton is traded at the National Commodity and Derivatives Exchange as wells and the Multi-Commodity Exchange. Cottonseed oilcake is a byproduct mainly used as an organic fertiliser or cattle feed and is traded at NCDEX.
Cotton is also produced and exported in the international markets. Other major cotton-producers are the United States, China and Brazil.
India is among the top exporters and future prices of MCX cotton are direct linked to those at of the Chicago Board and International Commodity Exchange. Unlike cotton, cottonseed oil cake is majorly traded in the domestic market and not exported.
On MCX, cotton futures traded mixed-to-bullish in August due to increased demand from the textile industries in the domestic market as some states roll back more restrictions.
An increase in farm activities in rural areas led to increased buying of cotton, especially in Gujarat, supporting prices in July.
Globally, the demand for cotton is reported to have grown especially in China due to easing lockdown, though China has not begun full-fledged buying of US agricultural products as agreed in their Phase 1 trade deal.
On September 3, MCX September cotton futures closed at Rs 17,750 per bale, higher by 9.16 percent compared to Rs 16,260 per bale reported on July 31.
In the month ahead, we expect MCX cotton futures to continue to trade mixed to bullish on the forecast of higher production of cotton in Maharashtra and Madhya Pradesh by 15-20 percent.
Higher stocks reports from last of approximately 85-90 lakh bales (1 bale = 170kgs) for the year 2019-20, compared to 25-30 lakh bales for the year 2018-19 will also cap spot and future prices from any major upside movement.
But then, exports have shown recovery in the global markets in the last few weeks as the Cotton Corporation of India focused on boosting exports from India, which could limit a major downside.
Moreover, reports of crop damage in the central and western parts of India has increased worries, especially in the last two weeks, which can reduce the yield. Traders are also cautious about the flood-like situation that can damage the crop in various parts of the country.
Cotton harvesting in China and the US could also begin in this month, which can also cap major upside movement in future prices. Overall, we expect sideways to bullish trend in MCX cotton for the month ahead.
(The author is Executive Director at Choice Broking.)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.