India: Cotton likely to tread on strong ground this year

Market Intelligence

India: Cotton likely to tread on strong ground this year

Cotton prices have recovered smartly from multi-year lows seen during the beginning of 2015. The drop was mainly on account of a drop in demand from China and ample supply, a classic supply-demand mismatch. As prices tanked and slipped below MSP, government purchases touched record highs. Cotton production during 2015-16 cotton year is estimated to be lower by around 3% from the previous year and is projected to be around 36.5-37.0 million bales. Low prices last year along with lesser yield due to pest attacks led to lower acreage and production. Weak Chinese demand could have affected this year’s prices as well but other Asian countries like Pakistan, Bangladesh and Myanmar are filling in. So, India’s cotton exports are projected to rise 18% y-o-y and our neighbouring countries will be significant buyers. The Gujarat government’s decision to provide a bonus of Rs 110 per 20 kg above the MSP of Rs 810 for 20 kg for cotton bought by Cotton Corporation of India has provided a boost to cotton prices. However, prices have moved above the MSP level in most states and farmers are selling to private players and the procurement by government agencies are set to plunge by 90% in the 2015-16 marketing year, compared to the previous year. The USDA in its latest December report, has forecast world cotton production in 2015-16 at 22.58 MT, that is 13% below last season’s. While India’s cotton crop is in its second year of decline and is expected to be 2012-13 levels, the fall in output is more dramatic for China and Pakistan, where it has fallen to the lowest levels in five years. Though world cotton stocks are expected to decline for the first time in six years, they are still at extraordinarily high levels. According to USDA, global cotton stocks currently represent 94% of the world consumption, which is more than double the average ratio that prevailed in the three decades between 1980-81 and 2010-11. The falling production for a second year in a row, stable global prices, improvement in export demand are expected to keep cotton prices above MSP levels this season and limit government intervention. MCX cotton prices during 2016 are expected to trade in the range of Rs 15,500-18,000.