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Cotton Prices Set For Further Uptrend

Author: Dasari Sreenivasa Rao/Wednesday, August 12, 2020/Categories: Exclusive

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Cotton Prices Set For Further Uptrend

Cotton prices have been moving in positive terrain in India and international markets as well. During July, ICE cotton futures rallied to 4-month high by making a high of 64.90 (cents /lb) on the back of upbeat export sales data. China bought more than $1 billion worth of American cotton in the past three months. Also the crop damage concerns due to Hurricane Hanna and weak dollar helped the counter go for a bull-run. US cotton production was projected at 17.5 million bales in July, 2 million bales lower than the June projection and 2.4 million (12 percent) below the 2019 crop, according to a latest report by SMC Global Securities.

Back in India, the cotton futures (August contract) were trading at Rs16,430/bale on Monday, while October expiry contracts were hovering at Rs16,890 indicating upbeat sentiment towards white gold. The trading unit of cotton on MCX is 25 bales and quotation is for bale (170kg) with tick size of Rs10.

Subhranil Dey, senior research analyst (agri commodities), SMC Global Securities, said: “Cotton futures on MCX remained trapped in a consolidated zone within Rs15,500-16,600. In the international market, ICE cotton futures (Dec) may witness lower level buying near 61 cents/lb, while the bullishness is expected to remain intact as it has the potential to test 68 cents/lb.”

Cotton cultivation in Telangana

The Telangana government is expecting rise of 14 lakh acres under cotton cultivation in the current Kharif season. The total area under cotton cultivation may reach 70 lakh acres this Kharif from previous season level of 54.5 lakh acres in Telangana.

After an extensive study on the commodities market and consulting farmers, traders, field-level agriculture officers and also agricultural experts, the state government came to a conclusion that there would be great demand for cotton in the near future. Considering the market potential, the state government is favouring cotton. It may be recalled that few years ago, the government asked the farmers to stop cotton cultivation and switch over to soya. But the situation is in favour of cotton.

With early monsoon setting in, good climatic conditions and the availability of labor have supported this accelerated pace of sowing across all states. Though cotton was a high-risk crop, farmers had increasingly gone in for it in the recent years because of its profitability. With good monsoon this year, cotton production in the next season (October 2020 to September 2021) will also be higher.

“The cotton markets across the country have witnessed good demand from the mills, as well. Meanwhile CCI has raised the cotton prices under their sales scheme following firm global fibre prices. The raw cotton exports continue to show signs of slow recovery, new domestic demand appears to be virtually non-existent. However, the gains were capped as the Kharif planting continues at record pace higher than the five-year average,” Dey told The Finapolis.

The government agencies have been actively procuring under the MSP program. However, they follow strict quality norms. The Cotton Corporation of India (CCI) has procured around 1.04 crore bales. It procured cotton so far in Telangana, Gujarat, Maharashtra, Haryana and Punjab. The season in Tamil Nadu has begun and will continue till September 30. Of the total crop of 360 lakh bales estimated by the Cotton Advisory Board (CAB), around 336 lakh bales have already arrived in the market. Daily arrivals are to the tune of 30,000- 40,000 bales. This may reduce once the monsoon sets in as farmers may bring out the cotton only after the rains.

Domestic market fundamentals

According to the Ministry of Agriculture and Farmers Welfare’s (MoAFW), cotton planting rose by 11.29 per cent to 12.125 million hectares so far in the current Kharif season of the 2020-21 crop year (July-June) from 10.895 million hectares in the previous corresponding period. The state-run CCI, currently the biggest stockholder of cotton in the country, has sold about nine lakh bales over the past one month.

According to the CCI, the carry-over stock at the end of the season would be 55.5 lakh bales. The arrivals from last October to June this year are 327 lakh bales. The production this season would be nearly 335 lakh bales.

CCI was scheduled to stop the procurement from August 1 due to tapering of arrivals and pick-up in rainfall. CCI’s current daily procurement is very nominal at around 1,000 bales in Maharastra and about 2,000 bales in Andhra Pradesh. CCI may restart procurement from September, if required.

International market fundamentals

The weather has turned favorable for the cotton growing regions in the US and the hurricane (Hanna) got some good rains after the heat-wave that raised crop damage concerns. Based on USDA’s July supply and demand estimates, 2020-21 US cotton ending stocks are projected at 6.8 million bales, 300,000 bales below the year before, but the second highest since 2007-08 when stocks were nearly 10.1 million bales. For 2020-21, the consumption of US mills is forecast at 2.8 million bales, a rebound from estimation of 2.5 million bales 2019-20.

For 2020-21, mill use for all major countries is forecast to experience a rebound as each country’s cotton spinning industry adapts to the anticipated recovery of the global economy. Adequate and relatively inexpensive cotton supplies will help the resurgence, which is expected to be led by China and India.

Forecast

In the near future, the cotton futures (August) are likely to find support in the range of Rs15,500-15,700, while the upside may get extended towards 16,700-17,000. Cotton Corporation of India (CCI) said the prices of the fibre crop have bottomed out and expects the demand from the spinning mills to pick up gradually on easing of lockdown. The overall demand, which looked dull a month ago, is gradually improving. The easing of lockdown norms and return of migrant labour are helping mills to restart operations. Mills need cotton and they have started covering. In the month of August, the market participants are more sales in the domestic as well as in the overseas market. Typically, low prices provide an opportunity for mills to increase their inventory during the lean period (July-September).

CCI has submitted a proposal to the Centre for signing an MoU with the Bangladesh government for export of 15-20 lakh bales in the next harvest season. Some 3,000 bales have already been exported to Bangladesh. Due to its proximity, India has a logistic advantage in selling to Bangladesh, a major cotton consumer. Bangladesh needs about 90 lakh bales (of 356 kg each) per year of which 30 lakh bales go from India.

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