Cotton prices have dropped by over 10 per cent across the country and over 20 per cent globally to a six-month low, but there are no takers for the natural fibre in view of slack demand for yarn and other downstream products.
“Cotton prices are correcting in forward markets for the upcoming cotton season (October 2022-September 2023). It is a natural process in this demand-normalised world and it is going as per the expectations of the industry. At the same time, current season cotton prices have currently started moderating and they will gradually decline in the next three months in various stages,” said Prabhu Dhamodharan, Indian Texpreneurs Federation Convenor.
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Speculators retreat
“In the global market, speculators have had to retreat after sellers of July futures mopped up certified stocks. On a single day last week, prices on the Intercontinental Exchange (ICE), New York, dropped by over 30 cents due to this,” said Anand Poppat, a Rajkot-based trader in cotton, yarn and cotton waste.
On ICE, July contracts have dropped below 100 US cents a pound and were last quoted at 96.86 cents(₹60,100 a candy), while October contracts are quoted at 107.35 cents (₹66,600) and December contracts 96.57 cents (₹59,625). In the past week alone, prices have dropped by 23 per cent.
Besides demand erosion, the firm US dollar outlook, global recessionary fears and a better crop outlook will lead to lower prices in the coming weeks and months, said Tarun Satsangi, AGM (Research), Origo e-Mandi.
But more informed traders point to speculators having to square their positions in the “on-call” sales, mainly unfixed ones, built in the July futures on ICE.
Lack of quality produce
The feature of “on-call sales” is that a buyer purchases cotton from a seller or speculator without fixing the price. Besides “on-call” sales, cotton prices had surged this year on firm demand and tight supplies.
In the domestic market, quality cotton is currently quoted at ₹90,000 a candy (356 kg), while medium and inferior quality cotton is quoted at ₹75,000 or less. “No one is buying medium or inferior quality cotton. Quality cotton is almost not available,” said Poppat.
On the Multi Commodity Exchange, July cotton futures were quoted at ₹41,330 a bale (₹86,549 a candy) for July delivery, ₹39,100 (₹81,880) for August delivery and ₹35,410 (₹74,152) for October delivery. Futures price had touched a record of ₹50,330 a bale (₹1,05,396) a few weeks ago.
In the agricultural produce marketing committee yards across the country, the average weighted modal price of cotton (the rate at which most trades take place) is ₹10,603 a quintal.
Traders’ demand
For the current crop year ending this month, the centre fixed ₹5,726 a quintal as the minimum support price (MSP) for cotton. For the next crop year, the MSP has been raised to ₹6,080.
The fall in prices has resulted in traders demanding cotton yarn at a lower price in view of the steep fall in December cotton futures. But Dhamodharan said, “Trade needs to understand the practical trend. As of now, expecting a steep drop in yarn prices based on December 22 forward contracts is a misleading indicator. Spinning mills cannot sell yarn based on the future prices of cotton,” he said.
“Traders have been holding cotton and the stocks have to ultimately reach the market. We will get to know the exact picture next month,” said K Selvaraju, Secretary-General, Southern India Mills Association, the apex body in the south for the textile industry.
Curbing operations
“Even at this price, spinning mills are losing money. They are selling yarn at a loss of ₹40-50 a kg. This is because there is no demand from the downstream industries as some units have slowed production,” Poppat said.
Yarn prices have also dropped by over 10 per cent in the past month. For example, 30CCH cotton yarn variety is currently quoted at ₹360-70 a kg from ₹410-15 a month ago.
Dhamodharan said a few in the trade are misleading buyers and creating panic. “Spinning mills are now drastically reducing production by declaring more number of days per week as holidays to rebalance the supply and demand. This is to bring some stability in the yarn prices,” he said.
Higher imports
Since cotton prices are exhibiting a declining trend, imports of cotton, allowed duty-free till September 30, could increase. “Cotton imports could easily touch 25 lakh bales in view of the falling trend,” said Poppat.
“We see imports crossing 20 lakh bales this season. It would be good if the Centre extends the deadline for allowing duty-free imports to at least October 30. SIMA is urging the government to allow duty-free imports till December 31,” Selvaraju said.
According to Poppat, about 9 lakh bales of cotton have been imported and deals have been struck for around 10 lakh bales.
The current situation, however, will not affect cotton sowing. “Cotton acreage will be 20-25 per cent higher in Gujarat. The Centre has raised the MSP and farmers would be happy to receive prices over ₹8,000 a quintal for kapas (raw cotton),” he said.
Origo’s Satsangi said cotton exports could be restricted to 40-42 lakh bales, while Poppat said 40 lakh bales have already been shipped out of the country. Last season, 78 lakh bales were exported.
(With inputs from Suresh Iyengar, Mumbai)