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White Gold Prices Shining on Global Cues

Author: Subhranil Dey/Wednesday, October 14, 2020/Categories: Exclusive

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White Gold Prices Shining on Global Cues

Cotton, termed as white gold by farmers, prices have been moving upwards owing to the crop damage caused by Hurricane Delta. On Monday, cotton futures (Oct30 expiry) were trading at Rs18,850/bale on MCX. Nov27 expiry futures were trading at Rs19,030/bale. During the past month, cotton on MCX gained by about 4.83 per cent from its low of Rs17,400, making a high of Rs18,240. The reason attributed to the anticipation of traders for bright export prospects this season, in the wake of subdued prices in India compared to the global market. In the international market, ICE cotton futures, rallied about six per cent from its low of 63.04 cents per lb, made a high of 66.93 cents due to crop damage worries from Hurricane Sally and storm Beta. Speculators raised their net long position in cotton by 524 contracts to 42,266 in week to Sept. 22, data from the U.S. Commodity Futures Trading Commission (CFTC) showed.

Cotton Corporation of India (CCI) would procure 125 lakh bales (one bale is 170 kg) of cotton, which is 20 lakh bales more than the 105 lakh bales procured in the previous season. Cotton futures (October) is on a bull run and this shall continue till Rs18,700-18,800 taking positive cues from the international market amid crop damage caused by Hurricane Delta and news in the domestic market that with regards to procurement. The trend of Cotton futures (October) is bullish. Hence, buying on dips is suggested near Rs17,700-17,800 would be suggested, eyeing a target of Rs18,700-19,200 levels. The opening stock for 2020-21 is about 100 lakh bales. But the most of this or about 80-85 lakh bales will be with government agencies, and only the rest with mills. So, as the new crop arrives, prices may go up on demand from makers of masks and medical cotton products both locally and in international markets. 

However, the traders are anticipating good exports after Diwali, but all depends on quality of fresh cotton arrival as well as demand from the global textile industry. This growth is expected in the backdrop of strong global demand for mask and surgical gown production along with lower domestic prices, which have made foreign sales economically viable. Indian cotton exports are likely to rise significantly in the 2020-21 season (October-September). From about 50 lakh bales (each of 170 kg) in 2019-20, exports may rise by 30 per cent to about 60-65 lakh bales, say trade sources. Ex-gin cotton prices are improving as mill purchases and exports of cotton yarn and fabric show signs of growth.

Global market

In the international market, ICE cotton futures (Dec) may remain stable in the range of 63-68 cents per lb (pound). Total US cotton textile and apparel trade declined considerably during the first half of 2020, compared with the corresponding 2019 period, but is expected to improve during the second half of the year. Although the economic recovery is expected to vary by industry, recent cotton product imports, a proxy for the textile and apparel industry, show a substantial improvement and are supportive of the ongoing recovery. World cotton trade is forecast at 41.7 million bales in 2020/21, about 1 million bales above last season and the highest since a record of 46.4 million bales in 2012-13. This season’s increase is largely attributable to Brazil and India. A relatively strong global economic growth outlook for calendar year 2021 supports the expected mill use growth this season, with most countries’ cotton mill use forecast to increase in 2020/21.

MSP

The Centre announced new minimum support price (MSP) for 2020-21 and the procurement. The Union Ministry of Textiles on September 1 published an order with the MSP for various cotton classes/varieties for Indian marketing year (Oct/Sep) 2020-21 season. The MSP will be effective from October 1, 2020, onwards. The MSP for long staple Shankar-6 variety has increased by five percent to Rs5,775 per 100 kilograms from last year. The arrival of KMS 2020-21 has already commenced and the Centre continues to procure Kharif 2020-21 crops at MSP from farmers as per its existing MSP Schemes as done in previous seasons. The Procurement of cotton seeds (Kapas) during Kharif Marketing Season2020-21 has also Started from October 1, 2020, and upto October 4, 2020, Cotton Corporation of India has procured 147 bales under MSP for MSP value of Rs 40.80 lakhs benefiting 29 farmers of Haryana.

Domestic Market Fundamentals

USDA estimates India’s cotton production at 29.4 million 480-lb bales in marketing year (MY) 2020-21 on an area of 13 million hectares. Well distributed monsoon rains have provided adequate moisture, accelerated the pace of sowing, and improved yield prospects, which are expected to increase by two percent compared to last year. The new crop arrivals of long staple variety cotton have begun in the Northern states of Punjab, Haryana and Rajasthan. While the quantities are very small, the farmgate prices remain well below the market prices from last year. This season the average national yields are around 492 kilograms per hectare, two percent higher than last year. In Andhra Pradesh, Telangana, and Odisha, heavy rains and prevailing weather conditions are favorable for incidence of sucking pest in cotton, and flower droppings as the crop is at the flowering/boll formation stage.

Certain districts have received excess rains and farmers have been advised to drain excess water from the fields. Due to excess moisture in the field, plants may fail to absorb the soil nutrients, which may lead to square and boll dropping. Excess moisture in the soil cotton crop may result in wilt, and square rotting. On the demand side, USDA estimates MY 2020-21 cotton consumption at 22.5 million 480-lb bales (28.8 million 170-kilogram bales/4.9 MMT). Mill buying has gradually improved over the past month largely driven by growing yarn exports mostly to Bangladesh, China, and Vietnam. Trade sources indicate that mills are currently operating at 75-80 percent capacity, which is likely to improve a little over the next two months with the arrival of the Indian holiday season.

Trade sources indicate that mills in Northern India are carrying stocks for 40-45 days. Larger mills are carrying stocks between 60-70 days, while smaller mills between 20-40 days. Similarly, mills in Southern India are holding around 45 days’ worth of inventory. The expectation of new crop arrivals, combined with weak domestic demand will likely keep mill buying to a minimum. On exports front, MY 2020-21 exports at 4.3 million 480-lb bales (5.5 million 170-kilogram bales/936,000 MT). The competition from other foreign origin cotton namely from Brazil and West Africa will continue to limit exports. The Cotton Corporation of India has began exporting directly to Bangladesh as part of a recent agreement with between the India and Bangladesh, that will help offload India’s large inventories. Cotton yarn exports continue to rise gradually as demand recovers in Bangladesh, China and Vietnam. There is also increased demand from Turkey and Portugal.

The writer is a senior research associate (agro) at SMC Global Securities Ltd

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