By Shrikant Kuwalekar -Cogencis,

Thursday, Apr 12

MUMBAI - Prices of cotton are set to hit multi-year highs of around 24,000 rupees per bale (1 bale = 170 kg) during May-Jun on higher overseas demand. Also, demand may rise due to more money in hands of domestic buyers with impact of demonetisation fading and refunds from goods and services tax pouring in, traders said.

In July 2016, benchmark cotton contract on the Multi Commodity Exchange of India had hit 23,990 rupees a bale. The most-active cotton contract on the MCX was at 20,840 rupees per bale today, up 0.3% from the previous close. This time, some traders, such as Pavan Indani of Shri Venkateshwara Brokers at Nanded, Maharashtra, are even more optimistic and expect prices to rise to over 25,000 rupees a bale by the end of June.

"India is the only country which has sufficient stocks of cotton until new crop from the US enters the market in September," said Indani, adding that fears of full-blown trade war between China and the US have triggered some short-term speculative buying of Indian cotton. Prices of Indian cotton remained in a tight range of 18,500-21,000 rupees in the first half of the season that started Oct 1, lower than previous season, due to lesser money in the system following demonetisation of higher currency notes and delay in refunds under the goods and services tax.

"However, refunds until December are being cleared across the value chain in the textile sector and in a few days (refunds for) even January will come in," said Naveen Chaurasia of Olam Agro India Pvt Ltd, the Indian arm of global cotton ginning and trading behemoth. "Easing liquidity crunch will be reflected in higher prices ahead, and (prices at) 23,500-24,000 rupees a bale is very much likely by May end, aid another official at a multinational trading company said.

Buoyancy in exports is expected to continue for a few months as Indian cotton is on an average 10% cheaper from other countries, traders said. Cotton from India is being sold at 80-81 cents a pound compared with global offers of 90 cents and benchmark Cotton Outlook index of around 92 cents. "Indian textile industry may witness shortage of cotton in a couple of months due to a pickup in exports. This may take prices near 24,000 rupees a bale by June end," said I.J. Dhuria, director of raw materials at ardhman Textiles Ltd.

According to Dhuria, around 5.5 mln bales of cotton have already been shipped out and another 1.0-1.5 mln bales may be sold overseas in the coming months, taking the tally to 6.5-7.0 mln bales by the end of season. The number is sharply higher than 5.0-5.5 mln bales initially estimated by trade associations. Domestic offtake from mills also remains buoyant as improved margins in Jan-Mar encouraged spinners to add 3.5 mln  spindles of yarn, said Atul Ganatra, chairman of Cotton Association of India.


"Domestic consumption is likely to top 33 mln bales this year which will significantly reduce ending stocks," Ganatra said, adding, the association may have to sharply lower its estimate of year-ending stock in the next two months.

The association has so far halved the ending stock estimate from December to 2.1 mln bales in its latest estimate for March, reflecting a cut of nearly 1 mln bales in output to 36 mln bales and similar increase in exports. The rise in consumption by mills would rather be reflected in the months to come.  

According to a report by Angel Commodities, domestic cotton arrivals until March were pegged at around 28.7 mln bales, or 80% of the total crop, up 5% on year. Gujarat recorded the highest arrivals at 7.6 mln bales compared with 6.4 mln a year ago, followed by Maharashtra at 6.7 mln bales, down from 7.4 mln bales in the year ago period.

Arrivals in Telangana and north India were pegged at 4.6 mln bales and 4.8 mln bales, respectively, both up over 5% on year, said Ritesh Kumar Sahu, research analyst at Angel Commodities. Prices of cotton are likely to touch 21,500 rupees a bale on the MCX in the next three-four weeks, he added. With supply of bollworm-hit poor-quality stock coming to an end, earlier stocks of better quality will fetch premium in local and export markets, traders said.

Though it is a bit early to predict next year's crop, initial reports hint acreage will fall 10%. This will keep supporting prices this quarter as actual sowing data will be available only in July.

Industry analysts expect cotton acreage to decline by 10-15% in Maharashtra and in Telangana, following widespread crop damages in the past season due to bollworm attack. Maharashtra accounts for around 30% of India's cotton output. Concerns over global supply following drought in cotton growing areas in the US will also support prices.

Though the US Department of Agriculture has estimated a 7% rise in planting intentions, UK-based research and consultancy services provider Cotton Outlook said drought in key-growing areas would continue to cast a shadow on overall yield. Back home, prices of cotton are also getting support from a likely sharp upward revision in minimum support price as promised by Prime Minister Narendra Modi.

The market expects minimum support price of long-staple cotton to rise to 4,950-5,500 rupees per 100 kg from 4,320 rupees currently. On the flip side, according to some traders, fears of a trade war between China and the US that are supporting prices at present, could lead to a fall in prices.

However, the probability of this happening is very low. "If China really imposes a 25% tariff on US cotton, as proposed, and if prices in the US fall, there is a risk of major buyers like Bangladesh, Vietnam, and Indonesia turning to cheaper US cotton," an official with a Mumbai-based prominent trade house said.   End (Source: