Domestic cotton markets, which remained under downside pressure since the beginning of the cotton season in October 2012, are now showing signs of recovery, amid firm prices in international markets.

Cotton is one of the most prominent cash crops, which not only satisfies consumption needs, but also generates revenue for the government. Global cotton prices are influenced by three nations ? China, India and the US. China is central to any discussion on cotton markets, being the world?s largest producer, consumer and importer of cotton.

India, being the second largest producer, consumer and exporter of cotton, commands a special attention in the world markets. In fact, participants across the globe are eyeing cotton trade policy developments in India as the country supplies a significant portion of its produce to global markets. India has witnessed a sharp rise in yield after the widespread introduction of genetically modified cotton seeds, i.e., BT cotton, in 2002-03, which turned the country?s status from being a net importer to net exporter of the commodity.

A surplus situation for third consecutive year in a row has led cotton markets world over to decline in 2012. However, notwithstanding sufficient availability, international cotton prices have recovered from their 10-year average of about 65-66 cents per pound and are currently trading around 90 cents per pound. A rise in the international cotton prices has been reflected in the domestic cotton markets, too, as this has raised export expectations from India.

After exporting a record 12.9 million bales in the 2011-12 season (October 2011- September 2012), India?s exportable surplus in the current season ? 2012-13 ? was pegged at 8 million bales. Although the Indian government allowed unrestricted exports for cotton, low global prices were making exports unattractive. However, with the rise in global prices recently, export registrations have increased and are expected to cross the cotton advisory board?s estimates of 8 million bales. If the amount goes much above the exportable surplus, it may exert pressure on the ending stocks, which might decline for the second consecutive year. Thus, traders, especially in Gujarat, the cotton capital of India, have now become cautious as the government might intervene to curb the rising exports.

For example, in Rajkot, the basis centre for MCX Cotton, prices have recovered from an average of around R16,095 per bale (1 bale = 170 kgs) during October-December 2012 and gained more than 13% in March 2013 due to a surge in export registrations.

On the Indian commodity exchanges, too, participation in cotton futures contract, which was launched around a year back, has seen a considerable rise of volume in the past 2-3 months.

Participants in the entire cotton value chain are effectively using this price risk management tool. At the MCX, average monthly volumes in cotton have increased by more than two times and stood at 4,686 lots per day in March 2013. Open Interest of 12,630 lots, too, doubled of what was in October 2012.

In the current context, fundamentals for 2012-13 season (October-September) seem to be a comparatively stable for domestic cotton markets if exports are maintained around the estimated levels. Considering the recent development of offloading stocks from the state reserves in India and China, we expect cotton prices to trade with a downward bias in the near term.

Prices, which are currently trading around R19,000 per bale, may touch R18,500 per bale in the near term. However, if international markets continue to trend upwards, cotton prices in our domestic markets will remain positive in the medium to long term. Cotton prices may tread towards R19,800 per bale in the next 2-3 months.

Tips for investors

* Cotton prices take cue mainly from demand-supply fundamentals prevailing in the domestic market as well as other major producing and consuming nations

* They are also driven by govt policies, particularly in China and India

* Periodical releases from the US, like USDA monthly crop report, planting intentions and weekly export

sales data also impact cotton markets significantly

* US to plant smallest cotton crop in four years and China and India to offload stocks from state reserves

The writer is associate director, commodities & currencies, Angel Broking