Source: The Hindu Businessline

G Chandrashekhar  | March 11, 2019 

After the initial promise of an attractive price rise following expectations of export to China early in the season, the cotton market disappointed stakeholders, particularly growers. With domestic mills keeping off and export order flow decelerating, market rates actually dipped towards the minimum support price.

Global factors, too, exerted an influence. The US cotton market faced a sharp downward correction because of the ongoing trade friction with China, which has resulted in the latter imposing a retaliatory duty of 25 per cent on American cotton. From over 80 cents a pound, US cotton slumped to around 70 cents a pound a couple of months ago. In other words, sentiment had turned weak.

Now, a revival is on the cards, especially in the Indian market. Export demand is just about beginning to pick up. Sensing that the market may have bottomed out, domestic mills, too, have begun to make purchases to build inventory. Cotton prices are clearly showing an uptick and every move above the minimum support price should bring relief to growers and policymakers alike.

Supply side concerns

There is some concern on the supply side though. While cotton output for 2018-19 has been revised downward by the trade to about 325 lakh bales, the Agriculture Ministry estimate is even lower and possibly closer to reality at 301 lakh bales as compared with the production target of 355 lakh bales. In other words, cotton market fundamentals are tightening.

There are concerns relating to quality. Unseasonal rains have reportedly damaged the crop and hurt quality in some producing regions. In other words, the availability of really good quality cotton is tightening. Popular variety Shankar-6, currently trading at about ₹42,000 a candy (355 kilograms), is in great demand. Trade representatives are confident S-6 rates will rise by at least 10 per cent in the coming months to around ₹46,000 a candy. Prices of other varieties will also be lifted as well.

China set to restock

Notwithstanding these supply side developments, trade representatives believe that export of about 50 lakh bales of cotton is a strong possibility. Bangladesh and China are two of India’s largest cotton buyers. After years of destocking, the world’s largest importer and consumer China will have to begin to restock cotton.

The Asian major has been buying the natural fibre from Brazil. India is now set to join the race.

An improvement in off-take and rise in price should send a positive signal to cotton growers for the upcoming kharif season planting.

Notwithstanding pest issues in the past two years, positive price signals can translate to coverage of about 120 lakh hectares. Subject to satisfactory temporal and spatial distribution of rains, India’s cotton production has the potential to rebound to well over 350 lakh bales in 2019-20.

Signals from the US too suggest a possible expansion in the planted area and a bigger crop in 2019-20. So, the world market will have abundance of cotton with output exceeding consumption and a possible stock build.

To what extent the anticipated slowdown in global economic growth will impact cotton consumption remains to be seen. (The writer is a policy commentator and global agribusiness specialist. Views are personal) (Source: The Hindu Businessline)