Cotton Value Chain

Market Intelligence

Cotton Value Chain

Cotton prices in India have moved up in the last fortnight by 1-3% as cotton arrivals have slowed down, especially from Maharashtra. The routine speculative activities are the reason for the slow arrivals - where farmers are holding on to stocks hoping for higher prices, and ginners are holding back on buying, in a bid to keep prices in check. Some ginners have cut down production too. With stakeholders aware of the lucrative export opportunities, it will be a matter of time before settlements balance out.

Another bullish factor waiting in the wings is the growing expectation that the Indian crop could fall to as low as 27.5 million bales - some 1.2 million bales below the current USDA estimate. Some even place the Indian crop at only 27 million bales, but that is wait and see just now.

Even as cotton prices rise in India, spinners are unable to pass on the raw material price hike to weavers, as demand is subdued in the market. Many mills in southern India are learnt to have cut down production. If the situation does not improve, more production cuts are imminent.

US Cotton Prices Move Up Too

In the US, cotton is testing higher prices, as weather factors have severely restricted the availability of US premium quality high grades. In the Southwest, cotton quality has suffered, but with little impact on yields. There is abundance of bales harvested, but still in the field. The Southeast is still counting its damage from Hurricane Michael.

US Spot Quotations Higher

Average spot quotations were 17 points higher than the previous week, according to the USDA, Agricultural Marketing Service's Cotton and Tobacco Program. Quotations for the base quality of cotton (color 41, leaf 4, staple 34, mike 35-36 and 43-49, strength 27.0-28.9, and uniformity 81.0-81.9) in the seven designated markets averaged 74.84 cents per pound for the week ending Thursday, October 25, 2018.

Daily average quotations ranged from a high of 76.56 cents, October 22 to low of 73.61 cents, October 24. Spot transactions reported in the Daily Spot Cotton Quotations for the week ended October 25 totaled 5,943 bales, significantly higher than 1783 bales on October 11. Total spot transactions for the season were 33,323 bales compared to 78,922 bales the corresponding week a year ago.

China, Vietnam Cancel US Cotton Orders

US cotton exports continue to lag the year ago sales, but shipments climbed on the week. Net weekly export sales of upland were 40,600 RB, with Pakistan, Turkey and Mexico being the primary buyers. China, South Korea and Vietnam all cancelled earlier orders. The South Korean cancellations were thought to be merchant-related, with the sales shifted to other countries because merchants had not been able to get the middlings 37's and 38's that the Korean mills needed. US quality problems will likely lead to additional South Korean cancellations.

Export shipments totaled 139,200 RB - up some 3% from last week. Primary destinations were Vietnam, Mexico, China, Pakistan and Indonesia. Pima sales totaled 11,400 RB, and shipments were 5,100 RB.

With world ending stocks expecting to continue to fall, prices are sure to find support, but the trip to the low 80s will be slow and deliberate. More than anything else, the market needs to see some fresh mill demand, which has been slow to materialise as mills continue to take up cotton on a hand-to-mouth basis as the eventual US crop size withers.

Future Prices Fall

Meanwhile, in the futures market, prices have slackened. December cotton settled lower compared to a fortnight ago. December 2018 cotton opened at 77.11 cents a pound on October 30, against a settle of 77.17 cents a pound on October 29. March 2019 was lower than a fortnight ago too at 78.66 cents a pound. And December 2019 was 76.75 cents a pound. The weekly average was up from 74.67 last week and from 66.91 cents reported the corresponding period a year ago.

Pakistan Cotton Prices Fall

Meanwhile, the Karachi Cotton Association spot rates were revised downward by Rs150 to Rs 8,750 per maund. The correction in cotton prices was the result of a shrinking in trading activity due to weak demand from world buyers of cotton yarn.

China Weighs Heavy On The Cotton Market

China's state reserves and its current production will ensure that there is hardly a supply gap for cotton in the 2018/19 cotton season. This could keep cotton prices in China under check.

Moreover, downstream demand has been dull, to a large extent, impacted by the US-China trade war. From September onwards, textile mills have reported lower orders compared to previous months. Dyeing and printing capacities are falling. This is causing a build-up of grey fabric inventory in the market. And in turn, affecting demand for upstream products. This will keep Chinese cotton prices weak, unless the trade impasse is resolved.