MUMBAI(Commoditiescontrol): The Gujarat government’s announcement on issuance of bonus over and above the Minimum Support Price(MSP) brought trend reversal post Diwali holidays.
A special Diwali gift to the farmers, The Chief Minister, Vijay Rupani, announced a special minimum support price(MSP) for raw cotton(Kapas) procurement from farmers in 2017/18 whereby the Government, via Cotton Corporation of India(CCI), will pay bonus of Rs 500/quintal above the prevailing MSP. (Full Report)
As soon as the news hit the market, cotton prices witnessed a trend reversal in both the physical spot trade and futures market. Spot prices across Gujarat rose by Rs 450/candy, on average, as a tight supply scenario was being painted in the market following the news. While the benchmark MCX November cotton futures opened a stronger note at Rs 18,250/bale, up 1.3 percent from previous close then surged to record an intraday high of Rs 18,510/bales(2.7% higher) and finally settled at Rs 18,470/bale, nearing two week highs. (Full Report)
The announcement of special MSP is clearly an election stunt according to various experts and the outcome of this announcement has set a market benchmark for raw cotton sales at Rs 4,520/quintal(medium staple) and Rs 4,820/quintal(long staple).
Farmers, not just in Gujarat but other states, will be willing to offload their produce above the market set benchmark which would raise cost of production of the entire cotton textile industry beginning from ginners right up to the retail level of garment sector. The first phase of which is seen in many states, namely, North India, Gujarat, Maharashtra where traders reported farmers’ unwillingness to sell cotton at lower rates.
This would hurt the cotton industry as a whole beginning from ginners facing huge losses for the third consecutive year while exporters who have entered into forward contracts at lower rates in early October will purchase at higher prevailing market rates in order to fulfill their December/January commitment, facing huge losses for the second consecutive year. Last year, reports suggest that exporters faced huge losses due to demonetization, said Chetan Naginkumar Bhojani, Director, Shree Gita Group.
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The prevalent cotton prices, taking the Gujarat Shankar 6(30mm) as the benchmark of our analysis, is around Rs 38,600/candy which in US cents/lb term would be around 75.63 cents/lb(ex gin) and it was trending below Cotlook Index A, down 2.6 percent, at 77.7 cents/lb. Export competitiveness could be lost if prices rallies to a potential of Rs 40,000/candy(78.38 cents/lb) and trends above Cotlook Index A.
On the other hand, the scale of impact on the industry would not be that great as the market is speculation phase with the selling price of Gujarat raw cotton was around Rs 4,300-4,600/quintal and Maharashtra raw cotton was sold a lower range of Rs 4,000-4,300/quintal. So there isn’t a much of difference between the announced special MSP and the market prevalent rate prior to the announcement. The arrivals going forward would be the key indicator as to where the prices will trend, said Dilip Patel, President, All Gujarat Cotton Ginners Association.
What would be the trend going ahead?
The new crop supply will be a trend setter and needs to be keenly observed in the days ahead. If new crop supply drops then the November 2016 like situation would be recreated where a big monetary change ‘demonetiziation’ was announced on November 8 midnight hitting the entire cotton textile industry due to tight supply.
In November of 2016, daily new crop arrival had dropped 60 percent to 55,000 bales on November 14 from 1.37 lakh bales recorded on November 8, the night on which demonetization was announced. Prices on the other hand surged 6 percent, in matter of three weeks, to Rs 40,150/candy(Guj S6 30mm) on November 21 from Rs 37,900/candy on November 7.
The market may find a key support at Rs 37,500-38,000/candy and has potential to gradually rally to Rs 40,000/candy after which we need to see whether it sustains those levels or the bulls lose steam as rising supply takes center stage along with uncompetitive export competition, eventually pressuring prices. Now, if the rising supply can only pressure prices if daily new crop arrivals consistently touches 1.5-1.9 lakh bales which could happen during the month of December if we take the above situation into picture.
This would also give the close export competitor, the United States(US), an upper edge to be the leading exporter for major importing countries which would increase US cotton prices, first phase of which saw the benchmark December contract on the ICE futures to hit limit up at 69.72 cents/lb, nearing two week highs. (Full Report)
The other factor which needs to be look out is the procurement procedure by the government assigned intermediary, The Cotton Corporation of India(CCI). The Gujarat government has taken the initiative to take up all the expenditure of Rs 1,250 crores borne by the State Government and Rs 10,675 crores by the Central Government, as per the official statement.
Further, around 40 centers of CCI in Gujarat will begin procurement procedure from November 1 while the remaining 16 centers will catch up eventually.
We will keep track of the supply/price trend going ahead and provide an updated report in the next fortnight or so.
(By Commoditiescontrol Bureau; +91-22-40015534)
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