Does Cotton Seed, Meal Price Rally Has More Legs?

MUMBAI (Commoditiescontrol) - Cotton seed market is on fire with an intermittent correction. Inaccurate crop size estimates last year and following season kept cotton seed market in dark. Early estimates for 2014-15 cotton crop projected over 400 lakh bales (170kg each).

Amid higher prediction, Kapas prices crashed below the minimum support price (MSP) which prompted the Cotton Corporation of India (CCI) procure a record level of Kapas at 87 lakh bales. Later, it was realized that the crop size lower that previous estimates and final number was at around 376 lakh bales; nearly by 8-10 percent down from early estimates. Kapas prices bottomed out only in February 2015.

Crop size adjustments to lower levels, were made only in Apr-May period. Eventually, the cotton seed industry could not make any stocks. The stockiest who usually remain active on the National Commodity & Derivatives Exchange Ltd (NCDEX) were also caught unawared.

Finally, India ended up with record low carry forward stocks for the cotton seed complex, be it seed or meal. Hence, prices for cotton seed and mearl rose all time high during September 2015.

Cottonseed oil prices have been largely guided by the other edible oil prices. The next season - 2015-16, began with the knowledge that the cotton crop was much smaller year on year mainly due to lower acreage and the pest infestation later on.

According to recent estimate put by Cotton Association of India (CAI) country's cotton production is likely to be around 341 lakh bales, sharply lower from last year. During the early season i.e. around October-November trade experts were betting production at 360+. CAI projected 2014-15 cotton crop at 382.75 lakh bales.

The cotton seed complex declined in line with the seasonality pattern but every dip was used by the stockists to buy this commodity. Scanty carry forward stocks and lower crop had the recipe of a record price for this complex written all over. And the same played out.

The prices are 35 to 40% higher year-on-year and are at record high. Smaller supply of the other the cattle feed ingredients like rape meal, guar seed, green grass all added fuel to the fire. The question now is what is the upside to the prices?

Going forward, the scenario may not play out the same as last year due to multiple reasons. Firstly, the record high prices will result in demand rationing at higher prices. Already there are reports of adulteration happening in the cotton seed oilcake that goes in for the animal feed. At some point buyer will stop chasing the prices higher.

Further there is severe scarcity of water in many parts of country, where dairy has been mostly populated like Punjab, Gujarat and Maharashtra. The situation is worse, particularly in Maharashtra. Water is required to feed cottonseed oil cake to milch animals and scarcity of water may result in lower cottonseed oil cake consumption.

Secondly the above normal monsoon will improve the prospect of next season feed availability. With Mustard new season starting, improved availability of Rape meal will also act as a cooling factor. Of all the factors, the main important factor is the demand and supply of the cotton seed.

The farmers have resisted selling Kapas at lower prices and continue to hold reasonable amount of Kapas. Tiered for waiting the whole season, the farmers selling is expected to improve at alleviated prices. The fact that the stockiest have been active most of the season and with next season expected to see higher supplies, some of the stockists may also book profit and start to invest in other commodities with better returns on investment. While this quarter continues to remain tight in demand and supply vis-à-vis last year, the next and the last quarter will see improved balance sheet, strictly in context of year to year comparison.

Temporary Correction Likely
Cottonseed oil cake may correct in near term as demand has slowdown at the higher level from consumers, followed by adulteration in COC, shifting demand to other cheaper alternatives (corn, wheat and tur husk). Further farmers had started using cottonseed oil cake DOC rather than cottonseed oil cake due to competitive rates and higher protein content (after mixing protein). Forecast of above normal monsoon in the country will also act as deterrent factor at higher level. In case of good monsoon and increase in acreage/cotton yield the weakness could get extend and vice-versa.

TECHNICAL OUTLOOK: - Cotton Seed (Price/20Kg)

A Wave (c) structure is in progress which may test the higher projection target level of 569 and 609.

Indicators like RSI and Stochastic are in overbought zone which suggest that momentum can continue if price movement sustains above 560.

Correction for near term may happen below 530.

Higher range can attract profit booking at 569 or at 609.

Trend appears to be up but minor correction from current level or higher range can happen.

Correction first to 515-505 can find support and overall weakness resumes below 500 closing.

Breakout was seen above 505 and if price start falling below 500 then Wave (c) termination would be in place for near term to short term.

Conclusion
Higher range can attract profit booking pressure from long position.



(By Commoditiescontrol Bureau; +91-22-40015533)