Cotton prices rise on weather concerns, demand

Cotton prices increased about ₹1,000/bale (of 170 kg), in 2 weeks to touch ₹16,800 in the futures market in April. This surge is due to forecast of below normal rainfall by the Indian Meteorological Department (IMD) in its first long range forecast in April.

However, the prices have been in a downtrend since the surge, with occasional recoveries due to weak international market, lower export demand and reports on record global stocks.

During May and June, cotton prices in domestic market moved both the sides, as bullish and bearish sentiments in market fluctuates depending on the fundamental factors. The prices moved down in June on reports of bumper harvest following a good monsoon progress, regular offloading of the fibre by the Cotton Corporation of India (CCI) in the domestic market and China’s decision to sell cotton reserves.

Meanwhile, prices improved on reports of bad weather in the US, affecting cotton sowing coupled with the lower planting and forecast of higher consumption and trade against lower production for the first time since 2019/10. In India, above normal rains during June has encouraged farmers to plant cotton in a record area.

According to the latest kharif sowing data by government, the cotton planting area has almost doubled compared to the area planted last year for the same period.

Since last two weeks, cotton-growing belts in the country especially, Gujarat, eastern Maharashtra and Telangana are facing a dry spell and farmers are waiting anxiously for fresh showers.

A long dry spell after the good initial showers last month is causing concern to farmers, which may results in production loss of more than 40 per cent or even have to re-plant.

In late June, IMD forecasted a strong El Nino during July, August and September, which will result in less rainfall in the Indian sub-continent affecting the growth and maturity of kharif crop and less moisture for the rabi crops.

Meteorological models show forming of strong El Nino and gaining in strength due to warm Pacific Ocean temperatures. This may result in drought conditions in Australia, Indonesia, the Philippines and India and torrential rains and flooding in parts of South America and the United States.

According to the latest press release by the International Cotton Advisory Committee (ICAC), forecast for world area and production is down while consumption and trade is higher for 2015/16 compared to last year. World cotton area is projected at 31.3 million hectares, down 6 per cent compared to last year while production is forecasted at 23.9 million tonnes (mt), down 9 per cent from 2014/15.

China’s cotton area is forecast to decrease by 12 per cent to 3.8 million hectares, and production down by 16 per cent to 5.4 mt, while India’s acreage under cotton is expected to decrease by 5 per cent to 11.6 mh which will limit the production to 6.6 mt.

World cotton consumption is forecasted at 24.9 mt, 3.3 per cent higher than last year.

Consumption in China expected to remain stable at 7.7 mt while India’s domestic use is projected up 5.6 per cent to 5.4 mt.

Strong demand from countries such as Vietnam, Bangladesh, Turkey, Indonesia, etc is expected to boost world trade as they rely on imports to support their spinning sector.

Currently, the new crop depends on the weather progress, which is just planted, or in its vegetative stage in India, US and China. Excessive rains and severe thunderstorm in the US during the planting season and below normal rains in India may affect the production for next season.

Further, in China, lukewarm response to cotton reserve sales might be an indication of concern about quality coming out of state inventories. This may be bullish for cotton as China may force to import as reserve stock locked from the market.

Meanwhile, as per the Commodity Futures Trading Commission (CFTC) data, there was a large positive swing in hedge fund positioning in net longs on New York-traded cotton, by a record 26,990 lots in last two weeks. At present, cotton prices are lower on strong fundamentals and market is waiting for a bullish shock, if they occur, will lead to higher prices from current levels.

The El Nino phenomenon, China cotton reserves quality and consumption demand are some factors that could provide cotton with an upside shock in coming months.

The writer is Associate Director - Commodities & Currencies, Angel Commodities Broking Pvt. Ltd. Views are personal.