Prices could witness selling pressure at higher levels

Sugar and cotton prices have risen in the recent past, a trend that might sustain in the very short-term. But, there are factors that could play spoilsport thereafter.

Internationally, cotton prices have witnessed a sharp surge in early half of this month. Cotton December contract, on the global reference ICE platform, has moved from 59.7 cents per pound (about 0.45 kg) to 63.7 cents.

Indian cotton price has risen by more than Rs 8,000 a bale to near Rs 16,000 a bale. (A bale is 170 kg.) Supply tightness in some of the major producing states in India and lower acreage forecasts are major reasons for the recent surge in price.

In the first week of October, the ministry of agriculture highlighted that the sowing area was down by eight per cent at 11.64 million hectares.

The International Cotton Advisory Committee (ICAC) has predicted cotton production in India to be around 6.37 million tonnes or mt (375 lakh bales of 170 kg each) in 2015-16, around 2.15 per cent lower compared to 2014-15 production estimates of 6.51 mt (383 lakh bales). Several other agencies and our primary research survey suggests that the 2015-2016 production might be around 370-375 lakh bales, which is evidently lower from the last year.

Given the factors, bullishness in cotton is likely to prolong for another few weeks. However, we also need to look at the good amount of new crop arrivals which are expected in late October in India. Given the higher carryover stocks, interim supply pressure might put a halt to recent gain in price. Hence, we believe that cotton price might rise further by two-three per cent in domestic market following which a new interim bearish trend could emerge. Cotton price are currently trading around Rs 16,000 per bale and might advance to over Rs 16,500 per bale level but might thereafter fall by seven-eight per cent in the short-term.

Sugar prices are seen emerging from a prolonged bearish trend to trade near eight-month highs at NCDEX and ICE platforms. Weather concerns in India and Brazil the top sugar producing nations, diversion of sugarcane to ethanol in Brazil might take global sugar inventories to deficit after years of remaining in surplus. Platts Kingsman, industry leader in providing prices and sugar analysis, pegs sugar supply deficit for the season 2015-16 at 1.2 mt in its September outlook.

Indian sugar prices at futures gained nearly 27 per cent till October 2015 from the lows set in June 2015. Sugar prices further sought support after the apex body of sugar mills, ISMA, in its first advance estimate, lowered sugar production estimates by six per cent to 27 mt against 28.8 mt in 2014-15. Despite lower production estimates, this season India might not witness significant deficit due to huge carry forward stocks from previous season of nearly 9.1 mt.

Sugar consumption peaks during the festive season hence we expect the current rally in prices to sustain for another two weeks. Sugar crushing is expected to commence post-Deepawali celebrations and thereafter we expect the prices to step lower once supply gathers pace. Overall, we expect sugar prices to witness selling pressure at higher levels and trade in broad range of Rs 2,500-2,850 per quintal in near term.

The author is head of research, Kotak Commodities Services Private Limited.