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Re Fall Propelling Cotton Prices In Upside Bias

Author: Subhranil Dey/Wednesday, November 11, 2020/Categories: Exclusive

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Re Fall Propelling Cotton Prices In Upside Bias

Indian cotton in demand in global market for its competitiveness; Traders eyeing higher exports of over 60 lakh bales this time against 50 lakh bales in the previous season

Cotton futures (Nov) are expected to trade with an upside bias in the range of Rs19,500-19,800/bale. The demand side is giving strong signals amid the estimates that India’s cotton exports could jump 40 per cent in 2020-21 fiscal from a year ago to seven million bales, highest in seven years, as depreciation of the rupee and a rally in global prices allow exporters to clinch export contracts. A recovery in global prices could lift Indian exports to seven million bales  in the new season from five million bales a year ago. Most of the shipments are heading towards China and Bangladesh. In October, traders exported 700,000 bales and contracts for another one million bales have signed for November shipment.

Fresh arrivals started from mid-October, and the prices are expected to come under pressure because of higher supplies. Secondly, the fresh demand has slowed down at these elevated prices. The spinning mills are functioning only at 60-70 per cent capacity utilisation because of labour shortages. Cotton prices are quoting lower in Karnataka due to weakened mill demand. In Maharashtra cotton prices are dwindling amid weak buying by millers. According to the traders, weather conditions are largely positive, barring a few regions that are still overcast. Gujarat cotton prices are sliding down as private millers were uninterested in buying cotton at recent higher levels. On the export front, the exporters are facing issues like the freight rates for October rose sharply particularly for Middle East, European, North and South American ports. The availability of containers has further worsened even at major ports like Mundra and Nhava Sheva (Mumbai), while the situation at inland container depots is worse. 

Demand Recovery

However, we may not see any sharp correction and prices will trade on a steady note as recovering foreign demand should support higher shipments, increased competition from other origins will limit exports. Nevertheless, Indian cotton still remains one of the cheapest in the world. About 10 days ago, ICE cotton futures (Dec) were projected to trade sideways in the range of 65-71 cents per pound in the international market. In the last few session, ICE cotton futures has been trading with a bearish bias, as surging coronavirus cases fueled demand worries and US election uncertainty added further pressure. The upcoming elections and the new spike in COVID cases are adding some pressure on the market. Investors are getting a little bit nervous ahead of everything and are avoiding fresh buying. Investors are getting a little bit nervous ahead of everything and are avoiding fresh buying. The next 10 days will likely be quite volatile, because of the US elections, December fixations, options expiration and WASDE report.

Last month, cotton prices rose for the third consecutive month from Rs18,200 till Rs20,150 levels taking positive cues from the international market as well as pushed by good exports figures from India to various foreign destinations. With Indian exporters offering cotton to overseas buyers at a competitive price, demand for the natural fibre has gathered pace. At least six lakh bales—one bale is 170kg—of cotton has been exported since the start of the new season in October. China has developed a sudden appetite for various commodities, including from India, and exporting them from Gujarat ports is cheap, sometimes even cheaper than moving goods within the country. Exporting cotton to China works out cheaper than transporting it to textile mills in southern India. This is because ships from China that come laden with consignments such as machinery prefer to take shipments at a discount than returning empty. Indian cotton is in demand in the global market for its competitiveness. Traders are eyeing higher exports of over 60 lakh bales this time against 50 lakh bales in the previous season. 

In the international market, ICE cotton futures rallied from the lows of 64.86 to 74.60 cents per pound. Positive sentiment emerged in the aftermath of crop destruction in the US caused by hurricane Sally. Also, numerous bullish factors continue to push cotton futures higher. Positive money flows into commodities by speculative action and index funds, smaller than expected crops in the US and India, better than expected near-term demand; pent-up demand and China’s restocking and robust performance in grains and oilseeds. CFTC data showed managed money’s net long increased 5,253 contracts to 65,195 contracts on 20th October. This is the result of simultaneous addition to the long side positions by 5,070 contracts, whilst shortside dropped by 183 contracts to 3,185 contracts. The open interest upped to 292,619 contracts.

Domestic Fundamentals

USDA estimates cotton production at 29.3 million 480-lb bales in marketing year (MY) 2020/21 on an area of 13 million hectares. National average yields are estimated around 491 kilograms per hectare, which is two percent higher than last year. Heavy rains in central and southern India are expected to impact cotton quality and overall yields. According to rainfall data published by the Indian Meteorological Department (IMD), excess rains in major cotton growing states of Maharashtra, Gujarat, Telangana, Karnataka and Andhra Pradesh have led to flooding / water  logging of cropareas, adversely impacting cotton crop development. Prevailing weather conditions are favorable to the incidence of square and flower drop, wilt due to heavy rains, and sucking pest infestation. There are also reports of incidence of pink bollworm in cotton. Current weather conditions are also favorable to the incidence of sucking pest infestation. Due to excess soil moisture, root rot incidence may also emerge in the cotton crop. The minimum support price procurement for the new crop has commenced. As of October 22, new crop arrivals of long staple variety cotton in the Northern states of Punjab, Haryana and Rajasthan have reached 1.5 million bales. The farm gate seed cotton prices have increased by two percent since beginning of the new crop year (Oct/Sep), but remain below the market prices from last year and the new minimum support price (MSP).

The Cotton Corporation of India (CCI) remains active in the three states and is procuring supplies at prices 5-6 percent higher than current market rates. CCI has been purchasing seed cotton in the northern Indian states of Punjab, Haryana, and Rajasthan as arrivals pick up. Currently, CCI has purchased around 300,000 bales across the three states. CCI is expected to commence procurement in central and southern cotton growing states in late October/early November. Trade reports indicate that under the MSP program, the Centre has set a target to procure 12.5 million bales of seed cotton in MY 2020-21, which is almost 19 percent more than the procurement done in 2019-20. As of October 23, unsold stock remaining with CCI and state marketing federations is estimated at 4.1 million 480 lb. bales. Ÿ On the demand side, USDA estimates MY 2020/21 cotton consumption at 22.7 million 480-lb bales. In October, cotton yarn prices increased by 2.3 percent, while fiber prices have rose by eight percent. Fiber prices have improved due to a sharp rise in exports of cotton and cotton products, which has increased cotton use, estimated at 22.7 million 480 lb. bales.

Intl Fundamentals

The latest US Department of Agriculture (USDA) estimates indicate that global cotton mill use in 2020-21 is projected at 114.2 million bales, 12 percent above 2019-20, with China and India leading the rebound. World cotton production is forecast at 116.3 million bales in 2020-21, the lowest in four years, as reduced area more than offsets a higher yield. Global cotton trade is projected to increase three percent this season to 42.2 million bales and helps support the higher mill use estimate. Global cotton mill use remains forecast below production, pushing 2020/21 ending stocks to 101.1 million bales, the second highest on record behind only 2014/15. However, the global stocks-to-use ratio is expected to decline, supporting slightly higher world cotton prices in 2020/21.

US cotton production is estimated at 17.0 million bales, marginally below last month’s forecast, but 14 percent (2.9 million bales) lower than the 2019 crop. If realized, 2020 US cotton production would be the smallest since 12.9 million bales were produced in 2015. Cotton area in 2020 is forecast at its lowest in four years, with harvested area estimated at 2.3 million acres, nearly 600,000 acres below 2019.

The national yield is projected at a record 909 pounds per harvested acre, compared with 2019’s 823 pounds. The US cotton demand estimate for 2020/21 remains projected at 17.1 million bales in October but is 3 percent below 2019/20 and the lowest in five years. The US ending stocks estimate for 2020-21 remains forecast at 7.2 million bales, slightly below last season’s 12-year high. The stocks-to-use ratio is expected to reach 42 percent by the end of 2020-21, slightly above last season and the highest since 2007-08.

The writer is a senior research associate (agri commodities) at SMC Global Securities

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