November 27, 2014 (Source: 

Sliding cotton prices could be a headwind for companies that sell cotton seeds next fiscal year. Data from the Multi Commodity Exchange of India Ltd show that, since May, cotton prices have fallen 23%. What’s more, prices may remain soft as the export outlook is weak. China, to which the majority of India’s cotton exports go, is proposing to cut the quota that attracts low import duty.


If China persists with its new cotton policy, exports from India can fall as much as 36% in the current fiscal year, a report from CARE Ratings says. Domestic yarn mills, meanwhile, are reluctant to step up purchases. Inventories and relatively high prices in India (compared with overseas) are making them jittery. The situation is weighing on cotton prices, so much so that rates have fallen below the government’s minimum support price.


If the current trend of weak or falling cotton prices continues, farmers will have less incentive to sow cotton next fiscal year. In the 13 years between 2000 and 2013, annual cotton prices have fallen thrice. All the three years were succeeded by a drop in cotton acreage, data from the government-run Cotton Corporation of India Ltd indicate.


CARE Ratings also says cotton acreage can be impacted negatively if prices continue to fall. If indeed the next fiscal year sees a drop in cotton acreage, then domestic seed manufacturers like Nuziveedu Seeds Ltd, Maharashtra Hybrid Seeds Co. Ltd and Kaveri Seed Co. Ltd could be affected.


Cotton seeds are a major business segment for these companies and despite high penetration of hybrids, they are seeing strong growth in sales due to growing acreage. If the cotton acreage falls, the addressable market can shrink, which can lower growth, and intensify competition and price pressures, especially considering that there are abundant supplies of BT cotton seeds.


That is one reason why the Kaveri Seed Co. stock has been trailing the broader markets in recent weeks, even though the company’s performance in the September quarter was strong. However, analysts and the companies are not perturbed yet. They expect the introduction of better density weed-resistant seeds to sustain the growth momentum.


According to IDFC Securities Ltd, Kaveri Seed Co. expects the better remuneration (yield) to keep cotton acreage high. While the belief will be tested next year, the current trend of falling prices does not bode well for cotton acreage next fiscal year. (Source: