What Is The Right Price For New Season Cotton?

MUMBAI (Commoditiescontrol) - Since the expiry of July contract the new season cotton futures have gathered momentum and liquidity. On 8th August the new crop November contract made the high of 21550 per bale. Prices have continued to come down since then to make new lows every day. The latest low at around 19000 per bale a good 12% below the recent high levels.

Indian spot prices are not reacting to sharp correction in US / Chinese prices, despite a high correlation it shares with its global peers. Since end of June the import parity has consistently remained favourable and at the same time the domestic prices have remained high, facilitating higher imports. August total imports are now projected to be around 4 lakh bales, which is potentially the record import since 2001-02, the year in which India’s total cotton imports were of 25 lakh bales. However since then the consumption has exploded in India and at 4 lakh bales per month, the imports form only around 15% of the total monthly requirement. If there was a serious deficit in Indian market, and if the current high prices are reflective of that shortage, the imports would have been much heavier than what they are currently. Pace of imports going ahead will show the actual deficit in Indian market and would also help crystallise the 2015-16 crop size.

Clearer emerging scenario is that the crop size may remain same or improve a little despite lower acreage as good weather is expected to translate into higher number of picking and much better realised yields.

Indian prices are expected to remain very volatile early in the season due to conflicting signals emerging out of the domestic and global markets. Eventually both markets would fall in place as India is now the largest producer and second largest consumer as well as exporter of the world. Indian fundamentals would be an important guiding factor to the global prices.

Currently though, the Indian fundamentals are not very clear due to lack of clarity on the production as well as carry forward stock numbers. Hence one can investigate the parity with its global peers to derive at possible price for the new crop cotton.
December ICE is quoting at 68.44 cents per pound. At forward INR the equivalent Indian variety (at 5 cents per pound discount) Ex-gin, works out to be around 16,200 per bale. Without applying the discount it works out to be 17500 per bale, as against the current MCX Dec at around 19,200.

For China, including the 13% VAT but excluding the 40% import duty the ICE Dec works out to be 12,200 yuan per ton, including 40% import duty this works out to be 16,900 yuan per ton. Currently the Nov 2016 contract on ZCE is at around 14,400 yuan per ton. China under WTO has to import 894,000 tons at low import duty. As a result the import price at low duty also becomes a bench mark for new crop. Indian cotton (MCX Nov) delivered into China excluding 40% import duty works out to be around 14,000 Yuan/ton. Chinese yuan has been depreciating by 3-4 percent every 10-15 weeks, hence forward rate of Yuan is assumed to by 4% lower. At lower duty, clearly China would prefer to import from US and not India. For Indian exports to remain competitive either MCX Nov will need to come down or ICE Dec contract will need to rally.

Let us now look at the Indian fundamentals. Despite the correction in the global prices Indian imports have not exploded, especially in context of its monthly requirement. One can assume that the carry forward tightness is not as much as being perceived by the market. With comfortable carry forward and slightly higher crop the demand and supply scenario is expected to remain similar to last year or slightly better than last year. Same holds true for the first quarter of new season. But the prices are unlikely to fall to or below last year levels for multiple reasons.

First CCI was a net seller last year even after the new season began. Last year the crop estimates were close to 370 lakh bales for 2015-16 in the month of November and the carry forward stocks were record at close 75 lakh bales. There were huge disparities in the state wise production. While AP/Telangana regions saw near record production, the numbers were way off the record in western region including Gujarat. Prices dipped below MSP due to incorrect crop estimates on one side and supply heaviness in pockets on other.

Both the factors are expected to remain absent this year. Regional disparity is not expected to be as wide as last year despite very low acreage in some pockets, mainly due improved yields. India will continue to have exportable surplus, but none of it is expected to be burdensome due to the geographical proximity that India enjoys to some of the largest cotton consuming nations including Bangladesh, Vietnam and Pakistan. All three will continue to require large quantities of cotton. Hence even if the domestic consumption slow down persists in 2016-17, the cotton demand in form of higher exports, will absorb all the excess cotton, which itself is expected to be smaller than last year.

Average Oct-Dec 29 mm spot prices were in the range of 15,200 to 15,900 according to CAI. Despite an improved availability India is unlikely to test those prices. Weather remains a key risk as the 2015-16 Indian crop year comes to an end in September 2016. And all the uncertainty will keep the prices volatile till the best of new season harvest actually enters the market some-time in November. However if the weather was to remain stable, as it is now, the new crop prices could eventually form the bottom of 16500 to 17500 per bale in the first quarter (Oct-Dec) of 2016-17.

TECHNICAL OUTLOOK
MCX Cotton C1 Chart- Correction For Short Term Is Opportunity For Long Term Accumulation

The above chart is the weekly chart available since 2011.
Wave (e) of larger degree is being witnessed which is correction of the rise from 13970 to 23990. Retracement levels are placed at 20144-19046-17855.

Correction to retracement levels can be witnessed in short to medium term creating opportunity for accumulation for long term traders. Resistance is at 21400-21800.

A rise and close above 21800 can cause a reversal for rally to get past the peak of 23990. For the time being correction is being witnessed.

Conclusion
Medium to long term traders can accumulate at retracement. Near term to short term traders will expect correction with volatility. Objective for near term to short term is to exit long position. Stochastic oscillator has moved into oversold zone which suggest that in near term price likely to move higher with volatility after testing retracement levels.



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