)
The first half of the October-September cotton season is over. A majority of the demand and supply data is already factored into the prices. Production is expected to be 37.5 million bales (of 170 kg each) or slightly more.
Total exports so far, at 9.4 million bales, have already exceeded the Cotton Advisory Board's estimate of nine million bales. Euphoria in cotton consumption has reduced slightly due to Chinese economic slowdown. Even with a moderate consumption growth of about six per cent at 29 million bales, Indian exports would be considerably less by one million bales in the next six months. Quarterly demand and supply numbers indicate that April-June contract has the highest stock to use ratio due to higher arrivals and lower export demand. However, if the exports continue, even if in small quantities, and reach close to 10 million bales (for the full cotton season), the ending stock will become very tight and India will be left with stocks equivalent to less than two months consumption.
There are three factors, not connected to cotton, that will guide the prices from here - Chinese policy, weather and currency. China holds 60 per cent of the world stocks and has a stock to use ratio of 163 per cent. To put it in perspective, China consumes 7.7 million tonnes (mt) of cotton annually and has stock of 12.6 mt! China now wants to get rid of reserve stocks, some of which are more than three years old. China reduced its price for reserve stocks from 18,000 yuan a tonne to 17,250 yuan. If the demand for domestic cotton does not revive, China could cut the prices further and thus cap the demand for imported cotton. There are also rumours that China could impose import duty on cheap cotton yarn. Chinese risk to global prices is on the downside.
The apprehension regarding the occurrence of El Niño in 2014 has intensified. Some meteorological agencies assign a probability of 75 per cent for the manifestation of the phenomenon in the current year. The last time the phenomenon was recorded with a moderate intensity was in 2009, causing significant impact on agriculture. Moisture stress is already evident in the crucial cotton state of Texas in USA. There are already reports of less than ideal sowing weather in Yangtze River basin of China. Indian cotton crop remains heavily monsoon dependent due to lack of irrigation in most cotton growing region. The weather risk to prices are on upside.
Last but not the least, is currency. Towards the fag end of the season, when the good quality cotton is scarce, chances of cotton import increase. Import parity is not currently there. Considering that Indian prices have limited downside, if the currency was to appreciate sharply, it will result in higher imports. There was a time when the rupee touched 59.50 against the dollar and the Indian currency has appreciated around two per cent year-to-date. In that, Chinese yuan depreciated three per cent. This scenario is a double whammy for Indian exporters of cotton as well as cotton yarn.
Historically, the studies indicate that the monthly average prices dip marginally during April to July and then rally in the last quarter. Sufficient supply this quarter and risk of cheap imports could keep the prices capped in the near term. But tight ending stock and weather vagaries would only accentuate the year-end rally in cotton prices.
The author is vice-president, research, Kotak Commodity Services
