Since the beginning of the cotton year 2018-19, the Cotton Association of India has twice trimmed its production estimates. Industry sources expect output to be even lower than official estimates
After having been bearish throughout December, cotton futures stabilised in the first half of January. Since early December, MCX cotton futures fell more than 7% in early January to Rs 20,550 a bale, the fall due to a substantial drop in exports (around 17 lakh bales in the first three months of the 2018-19 crop year (Oct-Sep).
Nevertheless, with a further reduction in India's 2018-19 cotton output estimates, prices have now shown signs of recovery. Along with developments in domestic markets, positive momentum is being seen in global markets, too, amid optimism about Chinese purchases.
Since the beginning of the cotton year 2018-19, the Cotton Association of India has twice trimmed its production estimates. Industry sources expect output to be even lower than official estimates.
The 2018-19 estimated cotton output is at 335 lakh bales (1 bale=170 kg), 5.25 lakh less than the November's estimate and almost 30 lakh down from last year's 365 lakh bales. Moisture deficiency this season has led to farmers uprooting cotton plants, resulting in no scope for the 3rd and 4th pickings.
The present trend in overseas sales is not so promising with only 17 lakh bales exported from October to December. Judging by the current trend in overseas demand and less cotton available in the home market, exports in 2018-19 may be around 51-54 lakh bales, lower than last year's 69 lakh.
Global cotton prices, though not very attractive from a fundamental perspective, still hold potential to move up considering seasonal price trends. This, and renewed confidence that the US and China will end their trade dispute would support upward movement in the benchmark ICE cotton futures.
Of the few fundamental factors that supported the bears in global cotton markets was lower demand from China hampered by trade disputes with the US. With seven months left for the 2018-19 global cotton year to end, it is still possible for Chinese imports to rise after mill inventories start to decrease.
Considering all these factors, we expect a gradual recovery in cotton prices as supply shortages may be felt with receding supplies in domestic markets.
The author is Head - Commodity Research & Advisory, Anand Rathi Commodities.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.