MUMBAI (Commoditiescontrol) - Cotton prices have increased rather rapidly since last week of March when the benchmark S- 6 29 mm dipped very close to the seasonal low made at the peak of harvest, in last week of October 2015 at Rs 31800 per candy. In March 2016, prices once again dipped to Rs. 32,100 per candy. This prolonged hibernation of cotton prices was due to the supply heavy first half of Cotton season (Oct-Sept). In fact even with decline in acreage and big damages to the cotton crop was known before the harvest, the prices dipped to below the minimum support levels in many areas.
CCI had to buy cotton under MSP programme, albeit the procurement was at much smaller scale of around 8.4 lakh bales vis-à-vis around 86 lakh bales last year. But the fact remains that for all the bullish news that was in the market, prices did dip below the MSP levels in many parts of the country and remained depressed till last week of March 2016, when the prices once again dipped threateningly close to the seasonal lows of the season.
The above remains a strong evidence of the fact that Indian cotton year opened with record carry forward stocks, conveniently not taken into account by the Cotton Advisory Board and the others leading to the balance sheet estimates that even went into negative towards the end of current season.
The negative balance sheet effectively indicates higher imports, as demand can never exceed the supply. If the supply is scarce even the demand goes down like it happened for many of the grains and pulses this year. Simply put you cannot consume what you don’t have. But imports also remained dismal. Till the end of May 2016 India imported close to 6.4 lakh bales of 170 kg, against the imports of 7.7 lakh bales for the same period last year. Evidence that the market had all the cotton it required and more.
However prices have rallied sharply since end of March and this in turn can be explained by the balance sheet getting tight, due to all the excess cotton getting out of the system in form of exports. India is likely to have exported anywhere between 62-66 lakh bales of cotton till date. With China not being in picture, this was unimaginable at the beginning of the current season. Most of the excess cotton in Indian system was absorbed by Pakistan.
Pakistan faced similar problem of White flies, like the one faced by farmers in north western region of India. Pakistan’s crop was lowest since 1998-99. At close to 90 lakh bales of 170 kg each (USDA), the production was down by 34% Y/y but at consumption was down only by 3% at 132 lakh bales. Clearly the rest was to be met by imports. USDA estimates imports by Pakistan to be at around 40 lakh bales. India was the logical source to have provided for this cotton. India did supply more than half of this requirement till end of May 2016. Trade estimates are that Indian may have exported little over 22 lakh bales of 170 kg each till date. That window may soon be closing though. Pakistan has seen early sowing and the crop there is expected to start arriving from Mid June 2016.
Of the two neighbours Bangladesh has remained one of the biggest and consistent importers of Indian cotton. The textile sector in that nation remains in the high speed mode due to the lower cost of production and various tax advantage to the major markets like Europe and EU. USDA data suggest that Bangladesh consumption has been increasing at a Compounded Average Growth Rate (CAGR) of 6.6% since last ten years! The nation saw record consumption and imports in 2015-16 and is likely to make another in 2016-17. Out of the 72 lakh bales that Bangladesh is projected to import in 2015-16; India has supplied around 19-20 lakh bales till date.
Clearly the peak export season from India is over and the exportable surplus with India remains minimum and subject to higher price realisation. Anything north of 1.50 lakh bales per month in form of export will result in tightening the Indian balance sheet.
As against this the import parity is yet to emerge. West African cotton delivered to mills in South India remains 1000- 1400 per candy higher compared to the equivalent Shankar 6 delivered to a mill in south.
The latest reports of lower sowing of cotton in Punjab and Haryana is already adding to the bullishness, as it will prompt mills to stock in anticipation of smaller crop. Initial reports from other parts also indicate lower crop. However improved yields this year is capable of more than making up for the loss in acreage.
Possibility of higher supply and lower demand next year has made more and more state governments to advise their farmers to not to sow cotton. That in turn improves the prospects of better cotton prices.
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(By Commoditiescontrol Bureau; +91-22-40015533)
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