Cotton prices decline 8% in September-October, may fall further 

Cotton prices have declined around 8 per cent in the past two months on concerns over demand and high carry forward stocks from last year. Moreover, reports of good production this kharif also weigh on cotton prices. On the National Commodity and Derivatives Exchange (NCDEX), cotton price declined from Rs 16,672.50 per bale (170 kg) on September 1 to Rs 15,369.80 per bale on October 30.

Reports about Cotton Corporation of India (CCI) planning to offload the stocks procured last year and looking to start purchasing new season cotton if the crop fits into the quality parameter added further pressure on the prices of cotton in the second half of October. High moisture content further discounted the prices for the new season crop.

Kunal Shah, head, commodities research, Nirmal Bang Commodities, said, “Cotton prices declined on account of improved arrivals in the market due to the inception of the new crop season from the month of October. As the first picking of cotton started in almost all the cotton growing regions, in Rajkot, one of the major cotton trading centre, the arrivals picked up from 5,648 quintals in the month of August to 9,390 quintals in September 2015. And the trend continued in the month of October also. The subdued demand also added to the woes.”

Production and Consumption

According the USDA latest release, India is expected to be the leading cotton producer in 2015-16 due to higher area. It has surpassed the US output in 2006-07 and now expected to overtake China in 2015-16 as area declines in China.

In its first advance estimate for 2015-16 in September, Ministry of Agriculture has estimated 355.1 lakh bales (one bale = 170 kg) of cotton, slightly higher than the last years estimate of 354.8 lakh bales. On the contrary, as per recent estimate by Cotton Association of India (CAI) cotton output in 2015-16 is set to decline by 4 per cent at 370 lakh bales for 2015-16, compared with 383 lakh bales last year.

This decline in cotton production despite the higher acreage is because of erratic rainfall in the country and pest attack in Northern India especially in Punjab and Haryana. According to CAI, cotton output in northern zone comprising Punjab, Haryana and Rajasthan is expected to be lower at 47 lakh bales (lb) against 53 lb last year. In the central zone of Gujarat, Maharashtra and Madhya Pradesh the production is estimated to be higher by 1 lakh bales at 205 lb compared to last years’ figure while in the southern zone- Tamil Nadu, Andhra Pradesh, Telangana and Karnataka, the production is reported to be lower at 112 lb against 118 lb last year.

As per CAI estimate, India will carry one of the largest closing stocks of cotton in its history at 72 lakh bales (lb), compared to 59 lb the year before. Thus, estimated total cotton supply for the season 2015-16 at 463.65 lakh bales while the domestic consumption is estimated at 325 lakh bales. The export during 2015-16 is estimated to be more than 60 lakh bales exported last year.

Outlook

For further price movement of cotton, Riteshkumar Shau, research analyst, agri commodities, Angel Commodity Broking, said, “The price outlook for cotton in next three months of the ongoing financial year may tend to remain mostly bearish due to arrival pressure and higher carryover stocks. However, during the end of the ongoing financial year, the prices may improve and touch Rs 17,000 per bale on expectation of improved export demand from India. Moreover, effect of El Nino phenomenon, deteriorating China cotton reserves and surge in consumption demand from world market may provide upside shock to the cotton prices.”

On the other hand, Shah said, “Everyone is eagerly looking at the China’s stance on cotton imports. China has an inventory of about 10 million tonnes of cotton and if they are trimming imports in view of this, it will be a huge setback for India. If so, the prices may take a downturn; else it is likely that prices may again move up till Rs 17,000 per bales.”

Factors to watch

As an investor you should study various factors before investing in cotton. Cotton prices in India mainly driven by the export demand from China and other Asian countries. In the recent years’, China imported more than half of India’s cotton giving much support to the prices. Thus, China’s trade and stocking policies is extremely significant not only to Indian cotton price but for the world cotton markets. For example, cotton prices have declined to Rs 14,000 a bale (one bale =170 kg) – near a five-year low during January last year as China slow down imports after stopping state stockpiling programme.

“The other factors which influence the cotton prices is the production and consumption estimates in major producing countries like India, China, the USA. The US is the major exporter of cotton in the world, which exports about 75 per cent of its production while China is the major consumer,” said Shau.

India is the second highest consumer as well as exporter coupled with the largest producer of cotton in the world. Since the US is major exporter – strengthening and weakening of US Dollar have major influence on the prices. A stronger US dollar may pressurise prices, as it make more expensive to holders of other currencies.