Domestic cotton prices have been gradually inching upwards since the beginning of February. Currently, Shankar-6, a variety of long staple cotton, is being quoted at over Rs 54 a kg against Rs 51 on February 1.
Looking ahead, the scenario appears to be quite interesting, given the likelihood of a domestic bumper crop, together with a drop in the US and Pakistan’s cotton output, and higher imports of Indian cotton by mills in Pakistan.
Add to it the uncertainty over amount of imports from China this season and the picture becomes even more intriguing.
As per estimates issued by the Cotton Advisory Board (CAB) in December ’06, India’s cotton output will touch 27 million bales (one bale weighs 170 kg). Domestic cotton production has never been so high.
Further, production can be slightly better than expected following the third spell of rains in the cottonproducing belts of Gujarat. This is likely to boost the ball formation phase of the crop, yielding more output per hectare.
The East India Cotton Association has revised its production estimates for Gujarat from 9 million bales to 9.5 million bales, taking the total expected production to 27.3 million bales.
It will be nearly 12% more than the previous year’s estimates. This is contrary to the initial market anticipation of an adverse impact of rains on production. The market was expecting a lower output of about 25.5 million bales. Industry sources attribute a part of the recent increase in prices to this belief.
Interestingly, it is not easy to conclude that such a robust jump in output will drag down prices.
There are several factors that turn the relationship between cotton output and prices non-linear. On the supply side, several large and small cotton traders are piling up stocks in anticipation of higher prices.
As per market sources, currently Cotton Corporation of India and Maharashtra Cotton Federation together hold over 1.5 million bales of cotton. This is about 6% of the total cotton arrivals so far. This may keep prices firm in short term.
On the demand side, mill consumption in India is rising by over 10% annually. It is expected to rise from 18 million bales last year to 20 million bales during the current cotton year.
However, spinners may not find it feasible to pick up the produce at prevailing prices. According to Alok Industries VP marketing Anil Nair, “In order to afford cotton purchases at current levels, spinners need to sell cotton yarn at Rs 6 to Rs 8 higher than prevailing prices.
And this is unlikely, given the resistance from domestic and overseas yarn consumers to raise prices.”
On the cotton exports front, demand from Pakistan is expected to rise. Pakistani mills are estimated to pick up 1.2 million bales this season, compared to less than 1 million bales in the previous year.
However, exports to China remained lower till February. Exports to China comprised three-fourth of the total cotton exports from India during the last season.
This year, the Chinese government has kept imports low to support local production. China is expected to come up with a fresh imports quota by the end of March. This will have a major impact on cotton exports and, in turn, on the supply dynamics in India.
Market sources feel that prices may stabilise for a while at current levels. However, these are likely to turn weak in the coming months, as exports as well as domestic offtake may not be sustainable at current levels.
Looking ahead, the scenario appears to be quite interesting, given the likelihood of a domestic bumper crop, together with a drop in the US and Pakistan’s cotton output, and higher imports of Indian cotton by mills in Pakistan.
Add to it the uncertainty over amount of imports from China this season and the picture becomes even more intriguing.
As per estimates issued by the Cotton Advisory Board (CAB) in December ’06, India’s cotton output will touch 27 million bales (one bale weighs 170 kg). Domestic cotton production has never been so high.
Further, production can be slightly better than expected following the third spell of rains in the cottonproducing belts of Gujarat. This is likely to boost the ball formation phase of the crop, yielding more output per hectare.
The East India Cotton Association has revised its production estimates for Gujarat from 9 million bales to 9.5 million bales, taking the total expected production to 27.3 million bales.
It will be nearly 12% more than the previous year’s estimates. This is contrary to the initial market anticipation of an adverse impact of rains on production. The market was expecting a lower output of about 25.5 million bales. Industry sources attribute a part of the recent increase in prices to this belief.
Interestingly, it is not easy to conclude that such a robust jump in output will drag down prices.
There are several factors that turn the relationship between cotton output and prices non-linear. On the supply side, several large and small cotton traders are piling up stocks in anticipation of higher prices.
As per market sources, currently Cotton Corporation of India and Maharashtra Cotton Federation together hold over 1.5 million bales of cotton. This is about 6% of the total cotton arrivals so far. This may keep prices firm in short term.
On the demand side, mill consumption in India is rising by over 10% annually. It is expected to rise from 18 million bales last year to 20 million bales during the current cotton year.
However, spinners may not find it feasible to pick up the produce at prevailing prices. According to Alok Industries VP marketing Anil Nair, “In order to afford cotton purchases at current levels, spinners need to sell cotton yarn at Rs 6 to Rs 8 higher than prevailing prices.
And this is unlikely, given the resistance from domestic and overseas yarn consumers to raise prices.”
On the cotton exports front, demand from Pakistan is expected to rise. Pakistani mills are estimated to pick up 1.2 million bales this season, compared to less than 1 million bales in the previous year.
However, exports to China remained lower till February. Exports to China comprised three-fourth of the total cotton exports from India during the last season.
This year, the Chinese government has kept imports low to support local production. China is expected to come up with a fresh imports quota by the end of March. This will have a major impact on cotton exports and, in turn, on the supply dynamics in India.
Market sources feel that prices may stabilise for a while at current levels. However, these are likely to turn weak in the coming months, as exports as well as domestic offtake may not be sustainable at current levels.
