AHMEDABAD: Cotton may be called commodity of the year as it has given the highest return so far in this calendar. When compared with other commodities that are part of the largely-tracked comdex-CRB Index internationally, cotton has performed the best, showing 74% returns in 2010. Coffee comes next with 45% return. Other commodities like silver yielded 40.31% returns, corn (25.93%), nickel (24.68%), live cattle (23.03%), gold (21.22%) and orange juice have 20.56% returns.
In the domestic market, cotton prices rose from Rs 25,000 per candy to a record Rs 44,000 per candy in the past 10 months, which suggest a return of 74%. Cotton prices saw a 64% rise in the past three-and-half months. In the international market, it went up 55 cents from 75 cents (lb) to a record price of 130.55 cents on Tuesday at ICE. "Tight global supply is the main reason for the spurt in cotton prices," said Harish Galipalli, VP (research) at JRG Wealth Management. "At present, all fundamentals are factored in and the market is in an overbought terrain. So some kind of correction is likely in the near future," he added. Prices can fall up to 105-110 cents level in the international market and consolidate for a while before bouncing back, he believes.
Analysts also said speculators have played an important role in lifting the price sharply. "When there is underlying fundamental support, speculative interests develop automatically," said one senior commodity analyst. "Current market prices might not be a fair price but one has to accept that it is the market discovered price," he said.
It is interesting to note that prices in the international market rose sharply after India, the second-largest cotton producer after China.
The country is also the second-largest cotton exporter after US. India imposed an export ban on the commodity in mid-April to ensure adequate supplies to the domestic textile sector. Later on, it lifted the ban and fixed a quota of 55-lakh bales for export which will be shipped from November 1.
Due to delayed harvesting, exporters are also unsure about the delivery of their commitments and facing risk of defaulting.
"Though the condition has improved on the arrivals front compared to a fortnight back, exporters may face shortage of quality goods," said one Rajkot-based exporter.
At present, daily arrivals stand at 1.5-lakh bales and will continue to remain strong on the back of a good crop size. Trade estimates suggest that the country is likely to harvest 3.50 crore bales for the crop year 2010-11 that began from October 1. If 40 lakh bales of carry forward is included, total availability for the year arrived at will be 390 lakh bales. On the other hand, domestic consumption will remain in the range of 250-270 lakh bales, as per the trade estimation.
Due to a sharp rise in cotton prices, economists see demand destruction for the next year if prices remain around the current levels for a longer period. "Demand level may not fall for this year as we have seen good economic recovery globally. Domestic demand is also very robust. But if price sustains the current level or if it inches up further, demand will fall from the next year," said Prerna Desai, economist with Anvil Share and Stock Broking. "There are two factors, which led to market speculation. One is weather and the other is quantitative easing by fed reserve," she added. She also pointed out that, market does not have any clarity on the crop damage due to cold wave in China and so it is hard to predict the near term trend.
