COMMENTARY. August weather may hurt cotton output prospects in India, US

August is known to be treacherous month. It saw weather aberrations in two of the world’s large producers and exporters of the natural fibre – India and the United States. While the US faced the fury of Hurricane Harvey and associated unseasonal rains, many growing regions in India faced dry conditions.

Texas, the largest cotton producer in the US, is the world’s third-largest cotton supplier. The damage in the US is yet to be ascertained; but marketmen are more or less certain there will be some loss. Cotton prices received a boost last week from the likelihood of lower production.

At the same time, dry conditions resulting from deficient rains in India –covering Karnataka, Madhya Pradesh, Uttar Pradesh, Punjab and Haryana –have put crop yields at risk. This is despite a sharp expansion of cultivated area to 12.0 million hectares as of September 1, a fifth higher than the 10.2 million hectares this time last year. There is now a palpable anxiety over yields and final crop outturn.

It is becoming increasingly clear that the global cotton market fundamentals in 2017-18 will be impacted by the final production picture that emerges in the US and in India by early- to mid-September. The market will have to settle for some decline in crop size from earlier expectations.

The world market has seen consumption running ahead of production in the last two years, thereby helping to ease the burden of humungous stocks. By early August there was clear expectation that the world cotton production and consumption would be fairly balanced in 2017-18. This picture has the potential to change depending on the final harvest size in the US and in India.

Closer home, the government has fixed cotton production target at 35.5 million bales (170 kg each) for 2017-18. Indeed, by early-August, there was widespread expectation that India’s cotton harvest would outperform other kharif crops and that the final outturn would be well ahead of the target, necessitating largescale institutional procurement to support growers. Now, it would be a big relief if the final production number comes close to the season’s target.

To be sure, there will be no tightness in availability because of the increase in production for two years in a row. After the effects of El Nino, which affected 30-million bales in 2015-16, production improved by 10 per cent to 33.1-million bales in 2016-17; this year, it could be in the range of 34-36-million bales. The domestic user industry will have no reason to complain.

According to the International Cotton Advisory Committee, world cotton production and consumption will be more or less balanced at 25.1-million tonnes, while stocks would be stable at around 18.5-million tonnes. However, it appears that the ICAC may not have factored in potential crop losses in India and the US.

China – arguably the world’s largest producer, importer and consumer of cotton – will continue to be the joker in the pack.

Will China continue to destock or will it begin to restock is an open question. From out of its humungous reserves, the Chinese government sold about two-million tonnes in four months since May, as a result of which the reserves are drawn down to 6.3-million tonnes.

In sum, weather behavior so far and risks ahead, have the potential to disturb the earlier forecast of a fine balance between world production and consumption in 2017-18. For the commodity market, it is axiomatic that when the market fundamentals are finely balanced, even a small change in either demand or supply can have a disproportionately larger impact on prices.

Those in the cotton trade – the physical market players – mustexercise caution. Allow the market to benefit from more solid evidence of crop size in India and the US. For Indian exporters, in addition to watching the rupee which has gained strength in recent months, tracking Chinese import policy and quantum of import is critical.

Bangladesh has been India’s strong partner in cotton trade; but of late, some skepticism seems to have entered the relationship. India must continue to engage with Bangladesh closely and address issues that create friction. It is important in the context of a general fall in export earnings on raw cotton to about $ 1.6 billion in 2016-17 from about $ 1.9 billion in the previous two years.

The writer is a global agribusiness and commodities market specialist. Views are personal