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Two commodities different as chalk and cheese and yet could face a similar fate this season are cotton and sugar.
Edelweiss Agri Research (EAR) study shows these two crops are not affected by a below-normal monsoon, albeit for different reasons. Ninety per cent of the sugar cane area is irrigated. In Uttar Pradesh (UP), where frequent flooding situation usually harms cane crops, a below-normal monsoon would result in higher yield and better realisation. On the other hand, below-normal monsoon perpetually ends seeing higher acreage for cotton because the crop has the biggest sowing window. Also, being a deep-rooted plant, cotton performs well in a below-normal monsoon. This year, when the debate of monsoon rages, both these commodities are likely to repeat the history, if the El Niño threat were to materialise.
The other common fate these commodities face is of lower exports, high inventories and falling prices.
EAR estimates that cotton will close with a record carry forward stock at the end of the season in September 2015, of close to 90 lakh bales (170 kg each). This is almost double of what was at the end of last season. Globally, too, the season will end in July at record stocks, with a record stock to use ratio, - just shy of 100 per cent. The US department of agriculture estimates of the top five cotton producing countries, all except India will see lower production year-on-year. China and USA will reduce the production by around 10 per cent each. India will see a crop similar to last year. EAR estimates the Indian crop to be around 390 lakh bales. And, yet, because of the record opening stocks, prices will remain under pressure in the next three to four months. The scenario in India could reverse quickly if global prices were to rise sharply, making Indian cotton export competitive.
However, the base case scenario in India is that cotton prices will remain range-bound in the next two months, and then dip in September-October. Prices could again go below the Minimum Support Price, forcing the government to buy in large quantities.
Domestic sugar prices are ruling at six-and-a-half year low on higher inventory and lack of export opportunity. Global prices are at levels earlier seen in December 2008. This is mainly because the biggest exporter, Brazil, has seen sharp currency depreciation. The Brazilian Real (BRL) has weakened by 45 per cent year-on-year and 21 per cent year-to-date. The trend has resumed with strengthening of thedollar. In India, state governments have compelled mills to clear the arrears or face the legal action. Forcible liquidation by mills and lack of demand will continue to see a fall in prices. Nearing of the 2015-16 crushing season adds to the pressure. EAR expects 2015-16 total supply to be at 37.5 million tonnes (10.2 mt opening stock + 27.3 mt production) vis-à-vis 35.5 mt (7.2 mt + 28.3 mt) in 2014-15. This is against the total consumption of around 25 mt. As a result, unless the government intervenes, the trend remains bearish.
Recently, due to the sharp fall in prices, Indian white sugar has regained export competitiveness to the West African, Sri Lankan and MENA regions. But that is unlikely to make any dent to the bearish scenario.
The author is vice-pesident-research - agri value chain, Edelweiss Integrated Commodity Management Ltd
