MUMBAI(Commoditiescontrol): Cotton arrivals in the country witnessed a slower pace at the end of January and data collated during the first week of February has shown no major improvement. Slowing arrival has raised doubts, whether India's cotton production could really touch 350 lakh bales in the current season or there is a strong case of further downward revision?
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Note: Arrivals between Feb-Sept is derived using the % Arrival of 7 Year Avg.
Supply pace in India was on par until December where cumulative arrivals reached 119 lakh bales(170kg each) compared to 7 year average supply during the same period reached 117 lakh bales. However, the real issue crept up when supply pace failed to increase during the month of January and cumulative arrivals lagged 11% at 167 lakh bales as of January 31 compared to 7 year average at 187 lakh bales.
The market was expecting arrivals to normalize as farmers were gradually releasing the stocks at a nominal rate ranging between Rs 4,500-5,500/quintal. And, for the first half of January, this was turning out to be true, as arrivals persistently clocked 1.6-1.8 lakh bales but the week(Jan 29-Feb 2) gone by, arrivals dropped to sluggish levels of 1.3-1.4 lakh bales.
Gradually this issue is turning into reality as daily supply pace averaged at 1.2 lakh bales during the first 9 days of February.
Confusion Amongst Traders:
As of Jan 30, total arrivals as per CCI reached 176 lakh bales, with daily arrivals averaging at 2.40 lakh bales. On the other hand, arrivals as per CAI reached 211 lakh bales. Various traders and experts, including us, believe that figures were overstated because as per the market collated data, arrivals have reached an estimate volume of 167 lakh bales.
There is a grave confusion in the market as to which is the accurate figure. Hence, we conducted our analysis on the historical 7 year average and Indian cotton production is revised lower 8.3% to 321 lakh bales from previous estimate of 350 lakh bales.
Diving into the 7 Year Average Analysis:
Conducting analysis on this issue based on the 7-year average, nearly 94% of the total season’s crop arrives until end of May. Bifurcate this and between Oct-Jan, around 52% of the total crop and between Feb-May, around 42% of total crop, should arrive in the market. So as of January, cumulative arrivals reached 182 lakh bales(52%) as per the 7 year average hence remaining 146 lakh bales(42%) arrived during Feb-May.
Scenario 1:
Applying the reverse calculation methodology and assuming that around 167 lakh bales is the 52% of the total crop arrived as of Jan 30 then total crop stands at 321 lakh bales and around 134 lakh bales(42%) should arrive between Feb-May(120 days) with a daily average arrival at 1.12 lakh bales, beginning from Feb 1.
Scenario 2:
If we take 52% of the potential production at 350 lakh bales then arrivals should have reached 182 lakh bales(52%) but this season’s cumulative arrival as of January is estimated at 167 lakh bales(47%) as per the data collated by our team and in order to reach 94%, until May, total arrivals required for the remaining 120 days(Feb-May) should be around 167 lakh bales(47%). This means that daily arrivals need to average 1.4 lakh bales for the next 120 days, beginning from Feb 1.
Scenario 3(Trade):
Further, there were some trade estimates at arrivals reached 200 lakh bales as of January. Taking this scenario into perspective, around 147 lakh bales is required to arrive in the next 120 days(Feb-May) at an average daily arrival of 1.23 lakh bales.
Present Scenario & Possibilities:
The present scenario is such that daily arrivals averaged 1.2 lakh bales during the first 9 days of February which is favoring the first scenario than the second scenario.
Historically, supply gradually depletes as the season progresses and arrivals to consistently touch 1.4 lakh bales(scenario 2 & 3) for the next 120 days is impossible. Also, during Holi festival period, arrivals have slowed down to 1 lakh bales or even lower. Holi is scheduled to be celebrated on March 2.
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Conclusion:
Which bring us back to the issue raised, if arrivals fail to improve, likely turning into reality, then there is a high possibility that Indian cotton production will be around 321 lakh bales, down 8.3% from prior estimate at 350 lakh bales. (Full Report)
Since, India being the largest cotton producer in the world, the short supply situation is setting a stage for the bulls to return in the market on a global scale. This could trigger panic amongst the outstanding large trade shorts to cover their position on the US cotton futures market in the form of short covering, pushing prices higher.
At present, the benchmark May contract on the US cotton futures is trading at 78.25 cents/lb, up 0.9% from prior close. With several factors such as, large trade shorts attributed to outstanding on-call position and large speculative long position, creating a tug of war scenario, prices has a tremendous potential to rally to 90 cents/lb, which is a long term target. The key support is placed at 75 cents/lb and key resistance at 80 cents/lb.
The Gujarat S6(30mm) last traded at an average price of Rs 41,000/candy(81.23 cents/lb). With no supportive factor on the bearish side, prices may not likely fall below Rs 40,000/candy while prices could gradually rally to Rs 45,000/candy by May.
(By Commoditiescontrol Bureau; +91-22-40015534)
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