New Tax Regime Rationalizes Domestic Cotton Prices

Market Intelligence

New Tax Regime Rationalizes Domestic Cotton Prices

Cotton

India’s cotton prices finally came down to a more rational level as new cotton season has arrived. Buying of the fiber has been limited as demand for the cotton yarn remained subdued under the new tax regime (of GST). Even exporters are facing difficulty to export fiber under the new GST rules and cost escalation. Further, global cues affected the local cotton prices. So, all factors have pulled down the local cotton prices in September.

The new price levels have, however, brought cheers to the yarn spinning industry and outlook for this sector has improved. The domestic spinning industry has been suffering due to higher raw material cost leading to negative margins. As the cotton prices have come down, the yarn spinning sector expects to have better demand for their produce and margins. This would, on the other hand, improve demand for cotton and its consumption while the country is expected to produce another big volume crop in this season.

On the price front, current domestic price for benchmark Shankar-6 variety is around Rs. 38700 per candy (355.6kg, on 27^th September 2017) which is lower by whopping Rs 3200 per candy if compared to end August prices. The outlook for price indicates that cotton prices would remain lower during the current cotton season compared to last season (2016-17).

On the global front, cotton prices weakened as global production figures remained high in spite of the adverse weather conditions in USA- a major cotton producer and largest exporter of the fiber. Further, China’s import of the fiber in the current season is expected to remain at last season’s level which means, cotton availability outside China would be substantially in excess of the consumption. This supply demand mismatch indicates towards a lower price regime during the current cotton season. However, the data published so far has not included any crop damage in USA due to the hurricanes. USDA’s data for current season indicates that world cotton production to be at 120.8 million bales up from earlier estimates of 117.3 million bales (of 480 lb). Consumption estimates increased to 117.7 million bales from earlier estimate of 117.4 million bales while ending stock to increase to 92.5 million bales from 90.1 million bales.

To look at the price trend, ‘A’ index has come down marginally in the last fortnight reflecting global price sentiments. A index was recorded at 79.7 US Cents on 26^th September which was at 80.30 US Cents per pound (on 30^th August). The index was at this season’s high of 94.9 US cents per pound on 15^th May. Historically, ‘A’ Index was at 78.55 US Cents in December 2016 end and was at 69.55 US cents per pound in December 2015 end.

On the yarn front, cotton yarn prices weekend as fiber prices have reduced. Indian cotton yarn exporters have reported of better demand but lower price scenario. As India’s domestic consumption of yarn has been slow for H1, 2017-18, surplus stock with producers is leading to lower prices.

Cotlook ‘A’ Index: 79.7 (As on 26^th September 2017)