Subdued demand, sufficient stocks weigh on cotton price despite lower output forecast

Cotton prices on Intercontinental Exchange (ICE) plunged to 15-month low this month due to bearish February USDA report, higher US sowing projections and trade war between largest exporter, the US and largest consumer, China.

In the latest USDA monthly report, world cotton consumption is revised lower by 2 million bales to 123.6 million. The forecast for ending stocks has been increased by 2.3 million bales to 75.5 million with a 2 million bale increase for China.

Moreover, world's stocks-to-use ratio for cotton is up at of 29.4 percent, highest since 2015.

For India, USDA estimated cotton-ending stocks to increase by 450,000 bales and mill use to reduce by 500,000 bales in 2018-19.

In 2018-19, cotton output in the country is expected to be lowest in eight years due to late and deficient monsoon rains in the main cotton growing states of Gujarat and Maharashtra. Lower acreage in Telangana, Andhra Pradesh and Karnataka reduce cotton production in south India by close to 14 percent or 13 lakh bales.

Moreover, Cotton Association of India (CAI) in its latest press release forecast cotton output at 330 lakh bales, down by 10 percent compared to last year's production of 365 lakh bales. It has also predicted imports to be higher by about 80 percent on year to 27 lakh bales.

From the demand side, CAI has revised down the consumption requirement by mills to 316 lakh bales from 324 lakh last season, mainly on lower export demand for yarn from the country. In the recent study by Confederation of Indian Textile Industry (CITI), export of cotton yarn to the European Union (EU) and China constantly declined in last five years due to duty disadvantage with Bangladesh, Vietnam and Pakistan.

Yarn export from the country has slowed down since September last year. According to Commerce Ministry data, India exported 3.81 lakh tonnes of yarn during Sep-Dec period, which is down by almost 10 percent on year. However, for the Apr-Dec period, the exports are up 18 percent on year to 9.22 lakh tonnes.

However, the cotton export from the country is expected to slow down in coming months due to comparatively higher domestic prices than the world coupled with stronger rupees. CAI in its latest release said that export volume is expected to be 50 lakh bales in 2018-19, down about 27.5 percent from last year exports.

Outlook

Cotton futures is heading for fourth straight month loss in February and also fallen to lowest in 10 months on higher domestic supplies than the prevailing demand from the bulk buyers. The spot prices have also slipped below minimum support price but active procurement by Cotton Corporation of India (CCI) is supporting prices above Rs 20,000.

Going forward, a decline in cotton price may be limited due to government support price. Therefore, we need certain fundamental triggers like increase in exports from the country in case of improving international cotton price following resolution of a trade dispute between China and US, lower crop outlook, forecast of deficient monsoon rains and weaker rupees. Boost to yarn exports may also help improving cotton prices in the country.

However, as per the current scenario, we expect cotton to trade under pressure towards Rs 19,500 as farmers continue to hold on to their stocks in anticipation of better prices, which is leading to higher imports while demand is still wanting from the textile mills.

The author is Ritesh Kumar Sahu, Senior Analyst- Agri Commodities -Angel Broking.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.