Cotton price improves on reports of crop damage

Overall price subdued, to improve margins of textiles mills

After hitting the lowest in nine months, cotton price recovered albeit marginally on reports of crop damage due to deficient rainfalls this monsoon season in major producing centres and sudden spurt in its demand from textiles mills.

The benchmark Shankar 6 variety of cotton reported an increase of nearly 3 per cent in the last two weeks to trade currently at Rs 10,967 a quintal in the physical market. In futures, however, cotton prices have declined by Rs 200-300 to trade currently at around Rs 11040 a quintal (~Rs 39,300 a candy of 356 kgs each).

Traders believe that the extended season rainfalls in October have brought a bounty for cotton crops especially late sown ones across the country. While the cotton output in India is estimated to remain higher this year, the initial crop damage may not be recovered. Still, markets are going to be fully dominated by supplies resulting into a subdued price trend this year.

"We expect cotton prices touch Rs 10294 a quintal (~Rs 17,500 per bale of 170 kgs each) during the peak arrivals season in November- December. Currently, lower than expected crop size in the country, reports of the Cotton Corporation of India (CCI) procurement, lower new season arrivals and improved export demand for Indian cotton is supporting prices as prices have improved from the low of Rs 10590 a quintal (~Rs 18,000 a bale) levels in August to currently trading at Rs 11058 a quintal (~Rs 18,800 a bale) levels," said Ritesh Kumar Sahu, an Analyst with Angel Commodities Broking.

The Cotton Advisory Board (CAB) in its meeting held in August had forecast India's cotton output to remain higher during 2017-18 than 34.5 million bales reported for 2016-17. Traders and cotton exporters estimate now the cotton crop size at 37.5-38 million bales this year on better use of seed and farm techniques to report least pink ballworm attacks on the standing crop.

MCX Cotton Oct futures surged to the higher of Rs 11529 a quintal (~Rs 19,600 a bale) from Rs 10812 (~Rs 18,380 a bale) but corrected steeply to Rs 11058 a quintal (~Rs 18,800 a bale) on expectation of good production during the new season mainly due to extended monsoon rains in October. The prices have surged so much due to unexpected rains in the key growing regions of Maharashtra and Telangana which slowed the arrivals of new season crops. Increase in demand by the millers has contributed to the bullish trend in both the spot and futures markets.

But futures have corrected in last three trading sessions due to expectation that the cotton crops in Maharashtra will benefit from the October rains which will enhance the production to late sown crops. In Maharashtra, monsoon rains in the cotton growing areas was deficient during 4 months of monsoon.

On the other hand, there is good carryover stocks from the last season. India imported about 1.85 million bales (170 kg per bale) during CY 2016-17 till June, up by 130 per cent compared to previous year imports, as per data released on Department of Commerce. However, exports have been down by 16 per cent in CY 2016-17 to 5.68 million bales compared to 6.77 million tonnes in previous year.

Aurobinda Gayan, Head - Commodities, Kotak Commodity, believes that the little mismatch of rain had caused crop damage in the western and southern Indian states. "In the last couple of days, the average arrivals have moved up to around 70,000 bales, a sharp recovery from the lowest level of around 40,000 bales in the first week of October. Going forward, however, we see the trend is likely to continue with supply going to increase further. Thus, markets are likely to remain bearish," said Gayan.

Arun Sakseria, a cotton trader and exporter, sees no room for a bullish sentiment in cotton prices this year following a bumper output estimate.

Meanwhile, higher input prices (primarily cotton) this year vis-a-vis last year added to profitability pressures for exporters during H1 FY2018, given the cotton-dominance of textile exports from India. While cotton prices have corrected to an extent from mid-September 2017 onwards which is expected to provide respite during H2 FY2018, recent revision in duty drawback rates is likely to exert some pressure on margins, an Icra study said.