November 25, 2014
The global cotton market is currently facing an extraordinary glut with rapidly expanding inventory, slowing trade and falling prices. The extent of inventory burden can be gauged from the expectation that ending stocks for the year could rise to an unprecedented 100 million bales plus or 23 million tonnes, twice the quantum of ending stocks in 2010-11 and roughly equivalent to a year’s world consumption.
The current year’s fundamentals are largely known. At play are other supportive factors such as falling crude oil prices, a stronger dollar and normalisation of US monetary policy. Multiple scenarios can be built about market conditions next year.
To start with, one can expect a supply response to prices. Disappointed with unattractive prices, growers are sure to plant less cotton next season in the US and in India.
One can reasonably expect that cotton acreage next year would shrink by at least 10 per cent and farmers may compromise on input management, which in turn can impact yields. Although the geopolitical environment is less volatile at the moment, undercurrents of tension and unease are palpable. Any flare up will push crude higher.
Major producers are likely to take steps including production cuts to defend crude prices. Rising crude prices will have cost implications. The dollar’s remarkable rally of the last few months may not continue for long. Currency experts are predicting a slowdown in further gains for the greenback which in turn will support commodity prices.
Weather is, of course, a major uncertainty. Overall, the world faced benign weather conditions in 2013 and 2014 that supported a rebound in agricultural output.
El Nino conditions that South-East Asia and South Asia faced in 2014 were mild with limited impact. A major weather event cannot be ruled out. Last but not the least, speculative capital has stayed in the sidelines the last two years because of surplus production and poor price appreciation potential.
Even a whiff of supplies tightening will bring back speculative capital that has the potential to push prices disproportionately higher. Cotton market participants have to exercise caution. Low prices may not last long and may begin to bottom out early next year.
(Source: The Hindu Businessline)