High Cotton Prices Plague Indian Spinners

Market Intelligence

High Cotton Prices Plague Indian Spinners

Indian cotton farmers are enjoying a rare bull run in prices, with spinners crying foul and demanding a curb on exports. The textile industry is also blaming the future’s trading platform which they claim has resulted in unhealthy speculation and thus price rise in the commodity. Since the start of the current (October-September) Cotton Marketing Year, average traded price of kapas in most markets have been well above MSP of Rs 5,726/quintal (medium staple). Talks of a global supply pinch and a short crop in the country had seen further price hike even as farmers decided to hold on to their crop. At present, kapas prices in most markets of Gujarat, Maharashtra and Andhra Pradesh is trading well above Rs 10,000/quintal which is a historic high. India’s cotton production, traders say, can be well around 300 lakh bales as against the earlier estimations of 340-345 lakh bales. Price of candy is around Rs 74,000 which has dimmed prospects of exports. Indian cotton exports, most say, would be around 30-35 lakh bales as against the normal 60 lakh bales of last season. Domestic demand, traders point out, would ensure not much produce leaves the country. Till date, around 130 lakh bales of cotton has arrived in the market with farmers hoping for higher prices in the days to come. However, textile manufacturers are crying fould. Tirupur textile manufacturers went on a two-day strike to protest against the high cotton prices. The industry has asked the PM to interevene too! The textile spinners are demanding a ban on cotton trading on the future’s trading platform of both National Commodity and Derivatives Exchange and the Multi Commodity Exchange. In their letter to the Prime Minister, they have complained of speculative activities mainly on these platforms which has pushed up physical prices. Tamil Nadu Chief Minister MK Stalin has lent his support to the textile manufacturers and asked for reduction of import duty on cotton to alleviate prices. Yavatmal gets highest cotton price in 50 years The rate of cotton in four places in Yavatmal district crossed the Rs 10,000 mark. Cotton fetched a record high of Rs 10,400 in the Fulsawangi market. In Yavatmal, Ralegaon and Wani markets also the price of cotton has gone up significantly. MCX terms textile industry demand irrational Leading commodity bourse MCX, responding to the textile spinners’ demand for banning futures trading in cotton, said they are making `irrational’ demand for suspension of futures trade in cotton on its platform despite fundamentals supporting high prices of the commodity. MCX, in a statement, said a ban on cotton futures would be detrimental as after many years farmers in India for the first time are benefitting from high prices driven by the fundamentals. India is a net exporter of cotton and the prices are moving in tandem with international prices. Further, cotton is not in the list of essential commodities and any suspension in the commodity may lead to undesirable economic outcomes, it added. Expressing "surprise" over certain pressure groups working for suspension of the cotton futures contract on the exchange, MCX said, "Their arguments are devoid of any merit and do not have any empirical evidence". The exchange alleged that the pressure groups are "lobbying for its suspension" at the cost of farmers who are major beneficiaries of higher cotton prices after many years. "By not allowing markets to function, the objective of such groups is to make transparent prices unavailable to farmers and reap benefits out of the opacity that would result from dysfunctional markets," it said. The unhedged are the ones who are actually getting exposed to higher price risk. The squeezed profit margins of these participants has led them to clamour for suspension, it added. Besides harvest, MCX said that the unseasonal rains also raised quality concerns, which is driving up demand for quality cotton. The farmers are also reported to be holding on to good quality cotton in anticipation of better prices for their produce. The supply is also adversely affected due to lower opening stock, which fell sharply to 75 lakh bales for 2021-22 against 125 lakh bales for 2020-21, following export demand on account of increasing global consumption. The arrival of the current cotton crop during October-December 2021 was down by 37%. However, prices started cooling off since November 2021, as arrivals in mandis improved. According to MCX, there is the active participation of hedgers in cotton derivatives on its platform with an efficient delivery mechanism and higher open interest volumes. "It is ironical that very purpose of derivative contracts is to protect from price volatility and those very groups, who ought to have hedged their risk on the exchange are clamouring for suspension of the cotton contract, which is a protective financial instrument,” it said. Stating that India is only a price taker and represent only a small fraction of the global derivatives market, MCX said the trading in global markets would continue as usual even if Indian markets are shut. As a result, the suspension of cotton futures in India only deprives domestic participants, especially small and medium value chain participants and producers from taking part in the global price discovery process and makes them totally exposed to price risks, it noted. On the other hand, many of the large domestic entities who are hedging in global markets gain a competitive edge over small and medium players, it added. In December 2021, the government had banned future trading in seven agricultural commodities, such as wheat, moong dal and soybean for one year in a bid to rein in prices. Cotton exports start to fall as merchants seek higher premiums Cotton exports have begun to fall as traders are expecting bigger premiums above US futures in anticipation of weaker output. This is even as there is high demand from local textile mills. Higher premiums demanded by India may compel Asian consumers such as Bangladesh, Vietnam, and China to import from other suppliers such as the US, Brazil, Australia, and African nations. "Exports are unprofitable. We're exporting a limited quantity to Bangladesh, but no other customers are interested," said Vinay Kotak, director of Mumbai-based Kotak Ginning and Pressing Industries. Cotton is being offered to purchasers in Bangladesh for January and February shipping at roughly 135 cents per lb, cost and freight included, nearly 20 cents more than US futures, according to dealers with global trading businesses. India often charges a premium of 5 to 10 cents per pound above US futures. Record domestic pricing, according to Kotak, might restrict exports in the 2021-22 marketing year, which ends on September 30. He predicts that India would send only 4 million bales this year, down from 7.8 million bales the previous year, as consumers shift to competing providers. So far this season, Indian mills have shipped 1.8 million bales and are expected to ship roughly 1 million bales in January and February, according to merchants. According to one dealer, a few clients from Bangladesh are paying higher costs for Indian cotton because they want rapid shipments and want guarantee of delivery. Almost 70% of India's cotton exports to Bangladesh are across land borders, making shipments more predictable than from competitors. Bangladesh also imports cotton from the United States, but the harvest will be ready only after March, and there is no certainty that supplies will arrive on schedule due to labour and supply chain constraints. Crops damaged by rain Cotton output in India might decrease to 34 million bales in the 2021-22 marketing year, down about 4% from the previous year, since crops in major producing states were damaged by rainfall during the harvesting season, according to Kotak. The decreased output is mirrored in spot markets, with daily trade volumes down to roughly 175,000 bales, compared to 250,000 bales at this time of year, according to a New Delhi dealer with a multinational trading business. According to a yarn manufacturer situated in Ahmedabad, Gujarat state, Indian spinning mills are actively buying raw cotton as export demand for yarn is strong. "Mills are accumulating stockpiles. This year, local consumption may exceed 35 million bales. We might need to import high-quality cotton," he stated. However, the 10% import tariff on cotton does not support imports. Higher global cotton consumptionAs compared to 2020-2021, the global cotton balance sheets for 2021/22 include higher production and consumption, and slightly lower ending stocks. The projected global consumption is up 700,000 bales. World ending stocks are projected at 86.9 million bales in 2022 which is 2.4 million bales lower than in 2021. India’s cotton production for 2021-22 is estimated at 330 Lakh bales, lower than 2020-21 by roughly 30-35 Lakh bales.