Cotton outlook: Another year of bumper crop and bumper prices

Current spot prices at Rs 20,500 a bale (170 kg) are 12 per cent below the levels seen at the beginning of the Indian cotton season October 1, 2013. This was expected as the cotton crop was expected to make new records in 2013-14. What has come as a surprise is prices have rebounded by 10 per cent since they bottomed in the first week of December at around Rs 18,500 a bale. Different scenarios could play out regarding the direction in the days to come.

So far, robust demand has supported the price. Export numbers suggests till mid-January, 5.5 million bales have been exported. This means 65 per cent of the total estimated exports of 8.5-9 million bales has been achieved in the first four months of the season. As against this, arrivals have been one-third of the total expected crop of 37.5 million bales during the same period. Clearly, higher demand has driven the prices since December. Consumption seems to be on the ascending path for the rest of the season that ends in September.

In the January-March quarter, 53-55 per cent of the total crop is expected to arrive, amounting to a little over 20 million bales. Because of delayed rain, a lot of cotton is still maturing. As against this, exports might dip a little at 3.5 million bales, compared with 4.4 million in the first quarter. Recently, import parity emerged and 200,000 bales of imports were contracted. Clearly, the quarter would be supply-heavy.

And yet, prices are unlikely to dip below the previous lows, as the annual cotton balance sheet of India remains tight. Assuming a crop of 37.5 million bales and exports of nine million bales and consumption of close to 30 million bales, ending stocks would look similar to what it was last year, which is close to 4.5-5 million bales. Prices will not fall in anticipation of higher prices in the second half.

Since the last couple of years, cotton yarn has emerged as a proxy to cotton imports from China. Cotton imports attract 40 per cent import duty, while cotton yarn attracts none. India remains the top supplier of yarn, and its yarn remains the cheapest in world. As a result, robust cotton exports and equally robust demand from domestic consumers will keep cotton demand in a very healthy shape.

Internationally, too, cotton prices have rallied quite sharply and the demand rationing has not really appeared at higher levels. The rally is supported by the understanding that US ending stock is the lowest in four years.

On the other hand, China with 60 per cent of total global stocks and 162 per cent stock to use ratio, has declared it would discontinue its controversial stock reserve policy in 2014-15. As a result, as we get closer to 2014-15, chances rise of global prices coming under pressure. While a lot will depend on the 2014-15 acreage and crop, the prices will remain under selling pressure in anticipation.

It can be concluded the prices are currently running ahead of their time. Reduced activity on account of the Chinese New Year holiday might provide a much-needed break to the current price rise. A five to seven per cent correction in the January-March quarter cannot be ruled out. The second half of the cotton year will see firm prices, as the Indian balance sheet is tight; a rally of 10-15 per cent after the correction is most likely. If the demand-side story remains strong, we might end up revisiting the prices seen during last year-end at Rs 23,000 a bale

The author is vice-president, research, Kotak Commodity Services