|
MUMBAI (Commoditiescontrol) - Cotton is at an interesting juncture. Record crop numbers are getting scaled down, but even after marginally lower crop estimate the overall balance sheet remains supply heavy. The similar situation prevails in global markets. The global stock to use ratio is at record, same is true for China. And yet the global prices as well as domestic prices have improved rather sharply in last couple of weeks.
A closer look suggests that this rally is driven by the availability of tradable stock both internationally as well as domestically.
On ICE, March futures are on its way to expiry and the deliverable stocks compared to the open interest are very low. In fact last time this kind of scenario was seen was in 2012. This has resulted in short squeeze. The hedge funds identified this trend earlier and started building the net long positions one month before the expiry and as a result they are making substantial profits on their financial investment. Fundamentals have only helped.
The USA planting intentions are doing round and it is expected that the acreage will decline by 12-15% year on year. Also the pace of exports, though lowest in last few years, is much better than what the prices were factoring in. The crude has also rebounded and lastly cotton prices have declined the most in current season vis-à-vis the competing crops Corn and Soybean. And this could result in greater fall in cotton acreage world over. Since the season that began on 1st October, cotton has gained by 4%, soybean by 12% and Corn by 18%. These are some of the factors that have seen prices gain on ICE.
As against this let us look at the Indian scenario. Indian season opened with around 50 lakh bales (170kg each). While there is debate about the crop size, it is believed that close to 253 lakh bales has arrived so far, the pace is higher compared to last season, when the arrivals were believed to be 235 lakh bales by end of February. Cotton consumption so far is assumed to be 125 lakh bales, imports of 4.5 lakh bales and exports of around 33 lakh bales. With this the ending stock could be around 152 lakh bales compared to around 89 lakh bales last time this year. No wonder then the prices are ruling close to 20-30 % lower depending on the variety year on year!
But here is an angle that is worth considering. Of the total crop arrivals close to 30% is with CCI. With net 70 lakh bales procured (2 lakh bales sold), the ending stock that is available for the business is only around 80 lakh bales, lower than last year! CCI has been selling cotton at higher prices, but is getting less response as the buyers are not willing to chase the higher prices.
Assuming that the CCI continues to procure till the month of May and procures close to 80 lakh bales, and does not sell anything India will go into negative balance sheet by September 2015. Hence it means that CCI will have to sell the cotton for prices to remain stable. Even if the CCI were to sell 7 lakh bales per month on average, and manage to sell total 55 lakh bales in this season itself, India will go into a tighter stock to use ratio at the end of the year compared to last year.
The balance stocks with CCI will not be available for market and hence result in higher imports towards the year end and higher prices. The annual export in current scenario is assumed at around 80 lakh bales. With exports of close to 75 lakh bales the situation will be similar to last year. Only if CCI were to sell all its cotton, and India were to export much lesser cotton, the lower prices are warranted. But if CCI is not proactive in selling cotton and ends up selling less than 55 lakh bales and exports are in the range of 75-80 lakh bales the price scenario gets bullish. Add to it the possibility that even Indian farmer decides to switch the acreage away from cotton, price rise could be sharper.
Possibility of exports recovering is higher. Indian cotton for the first time in the season has become the cheapest in the world. This should increase the pace of cotton exports from here on. CCI could also turn to be an exporter. On the other hand Indian cotton yarn is also one of the cheapest; with only Uzbekistan cotton yarn being cheaper than Indian cotton yarn. Monthly cotton yarn exports expected to have bottomed out in June 2014 at 85 million kilogram (kg). Since Nov 2014, India has been exporting 114 million kg on average every month. Exports of cotton yarn being a proxy to cotton exports is also price supportive.
Three factors that will need to be watched closely for the price direction: are CCI selling cotton, anything less than 7 lakh bales on average is price bullish. Since last two month India has been exporting around 6-7 lakh bales of cotton per month, it remains to be seen what kind demand is getting generated for Indian cotton after the recent emergence of price competitiveness. And last but not the least the cotton yarn exports also need to be monitored closely. While Indian cotton yarn remains one of the cheapest, but the economic slowdown could end up impacting the demand.
(By Commoditiescontrol Bureau; +91-22-61391533)
|
0 Comments 
Post Comment 
