August 5, 2014:
Cotton, also called white gold, has been under the grip of bears over the last few months on growing concerns over demand and rising global inventories. Cotton No.2 futures on the ICE has declined by 37 per cent from 97.35 cents a pound by March-end. They touched a low of 61.34 cents/lb last week.
Major reasons attributed to the decline are changes in ChinaΆs stockpiling policy along with a sharp decline in the import demand from the largest consumer of the fibre. This, along with rising end stocks in the US to the highest levels in over six years, has caused bearish sentiments in the global cotton prices.
The USDA has pegged the US 2014-15 end stocks at 5.2 million bales, the highest in six years. ChinaΆs cotton imports in the first half of 2014 have also declined sharply 42 per cent to about 1.4 million tonnes.
An increase in US cotton acreage along with favourable climatic conditions is also expected to result in higher production. Cotton prices in the country have mirrored the movements in global markets as we are the second-largest producing, export and consuming nation and thus, central to any changes in the world of cotton.
Cotton futures prices on the MCX have declined from ₹21,450 a bale (of 170 kg each) in May to ₹17,930, down 16.4 per cent by July-end.
Falling global cotton prices, record domestic output, ample supply and declining export demand have been cited as main reasons for the decline.
Sowing picks up
The countryΆs cotton output has rising continuously over the last few years as farmers have got handsome returns. With the area under cotton rising, the countryΆs 2013-14 output is projected at a record 36.5 million bales, leading to a supply glut.
Export demand has also been declining since the last few months adding to domestic stockpiles.
According to market estimates, cotton yarn exports declined about 20 per cent in the first quarter of the current financial year to 280 million kg from 360 mkg in the year-ago period.
Currently, cotton planting for the 2014-15 marketing season starting October is under way. Cotton planting started on a slow note and was 51 per cent lower year-on-year in early July due to delayed rains.
However, with the revival in the monsoon from the second half of July, sowing has picked up and is currently trailing only 3.4 per cent at 10.48 million hectares vis-à-vis 10.85 million hectares a year ago.
Price outlook
Global cotton prices have declined significantly over the last few months, which may lead to emergence of value buying at lower levels. A sharp downside from here may be difficult.
Prices have also fallen below synthetic alternatives such as polyester and thus, demand for this natural fibre is likely to boost prices.
ChinaΆs direct purchase from farmers also has come to an end and with no clarity on government support (of direct subsidies) to regions other than Xinjiang – output from the top producer may decline by three-fourths this year.
Domestic supplies continue to remain abundant, which may cap sharp upside movement in prices.
Going forward, the remaining two months of the South-West monsoon will play a crucial role as it may impact the countryΆs output, and thus, have a direct impact on prices.
Cotton prices on MCX (October contract) which are currently trading around ₹18,200 a bale, in the short term, may rebound to around ₹18,500-800 on short covering along with lower level of buying.
However, from a medium- to long-term perspective, we expect prices to decline from higher levels considering overall weakness in global demand and prices may drop to around ₹16,500.
Technically, prices may find strong support around ₹15,500, while resistance can be around ₹19,500 levels.
