Cotton Market Insights: Recent Key Developments-Cotton Prices Feel More Pressure

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The Indian textile industry is gradually gearing up, restarting operations and production with limited resources. The industry is operating at around 65-75% of its capacity, while it struggles with shortage of labour, significant slowdown in demand across the supply chain, uncertain world cotton scenario, the continued fight against a volatile Covid-19 and a severe financial crunch in the market.

But things are improving for sure, even as Covid-19 remains a major concern for the Indian economy.

There have been some important developments in the last fortnight. A major announcement was the increased MSP for cotton, which is certainly good for farmers but could prove a big hurdle for industry if this is not handled with care. Continued increase in MSP means rising price of Indian cotton, leading to uncompetitive Indian yarn pricing in the global markets. It could also create more possibilities for imports despite huge production of cotton within India. Or the other scenario would be that the government will carry an even bigger stock of cotton, with a lot of money and risk involved. It’s a big challenge for the government to increase income of farmers without hurting the industry. Government needs innovative approaches like DBT (Direct benefit transfer) or any other innovative ideas. As of now DBT would also be challenging, but with time it can be an efficient and popular scheme, if government has proper control on the process. This year (for season 2020-21), the government increased MSP for the medium-staple variety by Rs 260 per quintal to Rs 5,515 per quintal. The MSP for the long-staple variety stands increased by Rs 275/quintal to Rs 5,825/quintal, translating into an increase of approximately 5% from the previous year. On June 1st P. K. Agarwal took over as new CMD of Cotton Corporation of India. Cotton Corporation of India has made a record procurement of about 9.8 million bales so far in 2019-20 season and has committed to buy cotton at MSP till September. CCI expects to procure another 0.50-0.70million bales and total purchases exceeding 10 million bales in the 2019-20 season apart from 0.9 million bales from the previous year.

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Spinning mills and exporters are looking forward for more lucrative selling offers from CCI. Still CCI is keeping its prices higher than open market, even after considering its additional benefits of better quality, bulk quantity and others. CCI has kept changing its offers with revision in bulk discounting for 2018-19 and 2019-20 season cotton. May be this week they will come up with something more interesting for CCI’s cotton buyers. With MSP stocks expected to account for nearly half of beginning stocks and likely future purchases by CCI of the 2020/21 crop, the extent to which CCI markets its current supplies before and during its next procurement may influence global prices. As on 11th June, all India cotton sowing is up by 24%, compared to last year. Last year,  sowing till 11th June was on 1.53 million hectares, but this year this it has crossed 1.89 million hectares. Major increase in area is found in North India, Central India and south zone which has just started sowing, according to government sources. India’s stocks are forecast to more than double in the current year amidst the highest production in six years, a 4-million bales plunge in consumption, & a decline in exports. These factors have lowered domestic prices on the domestic MCX cotton contract more than 20% from June 19. Lower prices are good reason for Indian cotton to be competitive in the international market. India’s cotton yarn exports are more than 16% below the previous year for the first seven months of 2019/20.

Monsoon
Southwest monsoon has made a strong start this year, with India receiving almost 31% excess rainfall in the first fortnight (June 1-June 14) of the season that lasts from June to September. While central India alone received 94% more rainfall than normal during the period, southern peninsula received 20% excess rainfall. This was followed by 19% excess rainfall in northwest India.

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Retail
Worldwide, retail market shows an improvement, but still needs more push to create considerable movement in the value chain. China is improving rapidly with comparatively slow recovery in Europe & America. India is struggling with a rapidly spreading Covid-19, & is thus unable to push up demand in the retail market. However, some movement is going on as retailers reopen shops, & ecommerce picks up. German sportswear firm Adidas reported that sales had returned to growth in greater China faster than it had expected after coronavirus lockdown, while the reopening of business in Europe and the Americas was more gradual. Also they are expecting second quarter sales for greater China to be around the same level as last year.

US export sales for week ending 6/4/2020
Net sales of 399,600 RB for 2019/2020 were down noticeably from the previous week, but up noticeably from the prior 4-week average.  Increases for China (209,500 RB, including 2,200 RB switched from Vietnam and decreases of 28,700 RB), Vietnam (176,200 RB, including 2,000 RB switched from South Korea), Pakistan (13,200 RB). For 2020/2021, net sales of 193,400 RB were primarily for China (161,700 RB), Vietnam (22,000 RB), Malaysia (5,300 RB), and Bangladesh (3,500 RB).  Exports of 294,300 RB were up 24 percent from the previous week and 18 percent from the prior 4-week average.  Exports were primarily to China (86,400 RB), Vietnam (67,400 RB), Turkey (56,500 RB), Pakistan (32,400 RB), & Bangladesh (15,800 RB). Shipments also rebounded to 309,000 bales of Upland and Pima combined, nearly at the level needed to hit the USDA’s continuing 15 million-bale export forecast for 2019/20. Sales remain overly concentrated to a few markets. China accounted for 371,200 bales of total sales, & Vietnam was 198,400.

WASDE (The World Agricultural Supply and Demand Estimates) June 20
Key findings: In its June WASDE report, the USDA projected of 2020/21 domestic production and exports, unchanged Vs May at 19.5M and 16M bales, respectively. However, an increase in beginning stocks and a small debit to expected consumption forced the carryout projection higher to 8M bales, which is a highly bearish number. Aggregate world consumption was projected notably lower Vs May at approximately 114.4M bales for 2020/21 while production projection was little changed. Carryout for 2020/21 was projected around 3.4M bales higher Vs May on a reduction in estimated 2019/20 consumption. World carryout, less China was projected at around 69M bales while world aggregate ending stocks were forecast at an incredibly bearish level of almost 104.7M bales.

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ICE Cotton
In first week June 20, ICE July touched 62.30 its high from March 20, then again second week of the June returned from its high & now trading around 59 level again proved that world is not accepting such high prices with bearish fundamentals and big slowdown in world economies. During last 10-15 sessions some rollovers from July 20 to Dec. 20 & buying reported on July.  The next most active contract is Dec. 20, Now July 20 is trading near to expiry with reduced open interest &lower volume. Given the above scenario, & the ongoing geo political issues, global cotton prices will remain under pressure, with more pressure on Indian cotton prices.

(Vimal Verma is a cotton trader)

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