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Wheat and cotton in India buck the global trend

Prices fall in India on surplus supplies, jump overseas due to lower output

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In a rare occasion, and prices in India have bucked the global trend in the last three months due to a rapid change in fundamentals post monsoon.

Wheat price on the London-based benchmark Liffe exchange recorded a gain of 3.9 per cent at $331.8 a tonne, compared with 1.8 per cent decline at $286.8 a tonne (Rs 16,340 a tonne) on the National Commodity Derivatives Exchange (NCDEX). On the benchmark Nybot, cotton price witnessed a gain of 4.3 per cent at $1,657.2 a tonne against a 1.6 per cent decline in the commodity on India's NCDEX. The Kapas contract closed on on Saturday at Rs 1,533 a quintal translating thereby Rs 2,606 a bale.

“Wheat price in India remained under pressure because of record high inventory in (Food Corporation of India) godowns. Also, the prospects of rabi crop is also fairly good. In contrast, the worst drought in North American states and Russia lowered the crop output forecast for this season resulting in price going up overseas,” said Harish Galipelli, commodities head with JRG Securities Ltd.

FCI has reported a 35 million tonnes (mt) inventory as on January 1, 2013. Over and above around 88 mt of output is forecast for the current rabi season totalling thereby, a supply of 123 mt. Against that the annual consumption is forecast at 84 mt. Since the government has put a restriction on exports, handling such a massive stockpile is going to remain a major challenge for India.

In contrast, however, the drought in North Africa, the US and sormer Soviet republics is expected to lower wheat crop. The US Department of Agriculture estimated global wheat output to decline 5.9 per cent to 655.11 mt in the year ending May 31.

A recent study by the (FAO) of the UN said: “Early indications for the winter wheat crops already planted in the northern hemisphere, to be harvested in 2013, are mixed. Farmers understandably responded to the incentive of high prices by increasing their winter wheat plantings. However, conditions remain adversely dry for emergence and crop establishment before dormancy in important producing regions of the US and the Russian Federation.”

According to Vedika Narvekar, senior research analyst with Angel Commodities Broking: "Wheat prices in the international markets have plunged significantly in the last two months, however, Indian prices were sustaining at higher level on attractive overseas demand. However, in the past two weeks, domestic wheat prices have come under downside pressure as the existing cold wave condition in North India is conducive for the wheat crop. Also, the area under wheat cultivation has breached last year’ s level which may result into another bumper crop year for wheat in India. This may further add to the already overflowing wheat granaries, where stocks are almost three times the strategic reserve and buffer stocks norm."

The case is somewhat similar with cotton. The under the textile ministry forecast 3.45 million bales (1 bale = 170 kg) of closing stocks this year as against 2.85 million bales last year. Also, electricity supply in major textile producing states including Tamil Nadu, Andhra Pradesh and Maharashtra has hampered mills' production capacity resulting in lower demand of cotton in India.

During the last three months, however, cotton prices remained comparatively higher globally on account of an estimated revival in demand from China, Bangladesh and Taiwan in addition to other markets in developed countries. The revival in global economies with 3.4 per cent growth this year as against 3.1 per cent last year is gradually pushing textile industry back on track.

Cotton prices in the international markets have been able to sustain above 70 cents per pound mark since last three months and have risen almost 4.3 percent in the last one month. Notwithstanding the firmness in the international markets, domestic cotton prices have seen a divergent performance, with their prices on the downturn, largely on the back of poor demand by the millers, especially in Southern India. Millers in these areas are operating short of their capacity on the back of power shortages. Further, expected lower exports this season is also making cotton unattractive, Narvekar added.

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