Cotton prices may not decline till arrival of new crop: Ind-Ra

Cotton prices, which have shot up by over 35 percent since May 2016, are unlikely to come down sharply till the arrival of new crop from October despite state-run CCI's efforts to offload its stock in the market to contain prices, says India Ratings and Research (Ind-Ra).

The fall in domestic production has spiked cotton prices, which are likely to remain at a high level of Rs 120-127/kg till the cotton season ending September, it said.

The rise in prices is expected to squeeze profits of ginners and spinners by over 15 percent in the current fiscal, it noted.

"The recent government directive to Cotton Corporation of India (CCI) to sell its entire cotton stock to micro, small, medium scale spinning units will help contain the price rise of cotton. However, Ind-Ra believes that cotton prices will not see any steep decrease, till the arrival of the next cotton crop," the Ind-Ra said in a report.

There may not be any sharp fall since prices already factor in the release of stock from inventory, it said.

Cotton prices are expected to be under pressure on likely fall in acreage.

"Fear of losses from pest attacks and due to the lack of alternatives to biotech cotton hybrids, acreage (of cotton) is likely to decline. This may push up cotton prices further, however increasing demand for manmade fibre, will contain the price rise," Ind-Ra noted.

Stating that increase in prices will impact small textile players the most, the report said ginners and spinners are most likely to be affected. However, some organised spinning units with interchangeability from cotton to blended yarn will be able to adapt.

"Profitability of pure cotton ginners and spinners will be lower by at least 15 percent, on account of their inability to pass on this steep increase in cotton prices to their customers due to decreasing cotton demand and increased competitiveness of manmade fibre," it said.

However, players which have stocked up cotton at lower prices in March-April 2016 are better placed. Further, fabric manufacturers are likely to be affected the least, on account of their better interchangeable use of looms, it added.

According to Ind-Ra, lower cotton output in India is due to two consecutive bad monsoons and damaged cotton crop, caused by the pink bollworm pest in central and southern belt in and due to whitefly pest attacks in northern India.

As per Cotton Advisory Board, domestic cotton production is estimated to go down by 7.4 percent to 35.2 million bales (of 170 kg) in the 2015-16 season (October-September).

Globally too, cotton output is estimated to be lower by 18 percent to 98.1 million bales in the 2016 calendar year, as per the United States Department of Agriculture.