Demand picture has not been so attractive for cotton this season and thus one of the reasons for the fall in prices since October 2018.
Ravindra V Rao
Cotton markets have recovered almost 6 percent from 11-month lows hit in February. Fibre crop is among the most hit commodity in terms of output in the 2018-19 season due to the drought situation in the major producing belts of Gujarat and Marathwada. Despite this, cotton prices have fallen consistently since October 2018 pressured by weakness in the global markets. The heightening trade tensions between the US and China adversely impacted global cotton markets, ultimately hampering overseas demand for high-priced Indian cotton.
The recent rally in the domestic cotton prices is mainly on hopes of exports to China along with a further downward revision in the Indian cotton output estimates. Moreover, global cotton markets also have shown signs of recovery in the last one month on optimism over easing trade deals between the two cotton giants. The benchmark ICE cotton futures gained more than 8 percent over the last month.
Domestic fundamentals continue to showcase an optimistic price picture as ending stocks in 2018-19 crop year (Oct-Sep) are lowest in more than a decade and are down 40 percent at 17 lakh bales.
The latest estimates by the Indian Cotton Association pegs domestic cotton production at 328 lakh bales for the 2018-19 season, compared to its preliminary estimates of 348 lakh bales. The current year output is 10 percent lower than the 2017-18 season and is the lowest crop size in almost a decade. Another major component of the supply side is the carried-over stock from the last season. The 2017-18 season witnessed robust overseas sales which led to a 22 percent drop in ending stocks. Imports though doubled from last year, the total supplies still plunged 8 percent in 2018-19.
Demand picture has not been so attractive for cotton this season and thus one of the reasons for the fall in prices since October 2018. Exports are estimated to decline 20 lakh bales in 2018-19 to 50 lakh bales compared to last year. Domestic consumption too is expected to fall by 30 lakh bales to 316 lakh. Thus total demand may drop 5.7 percent this season. It is, however, to be noted that Indian traders have recently signed fresh export deals with China, which is over and above the 6 lakh bales already shipped so far since October 2018.
The global cotton market, which was earlier estimated to be in a deficit is expected to turn into a surplus in 2019-20. For 2019-20, the USDA expects a healthy increase in production to 126.5 million bales. Mill-use is projected to increase at a rate near the long-term average next crop year to 125.5 million bales. US-China trade relations would continue to play a major role and the main catalyst for global cotton prices.
Nevertheless, domestic cotton prices should stay positive amid the recent developments over exports. Moreover, increasing probability of Elnino is a concern for Indian monsoon, and thereby for the Kharif grown fibre crop.
The author is Head - Commodity Research & Advisory, Anand Rathi Shares and Stock Brokers.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.
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