Cotton’s Short Squeeze Has Prices Soaring Back To Decade Highs

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Cotton futures surged back to the highest level in more than a decade, leaving traders with short positions struggling to secure supplies. The fibre has jumped almost 50% in 2021 on expectations for a second straight world deficit, pulled by soaring demand, especially for apparel. The rally is boosting clothing costs and is part of a trend hitting budgets at home.

Supplies are so tight, there’s a short squeeze in play when it comes to the nearby December futures contract, which ought to fuel even more upside for prices. Some commercial traders are holding a large sold positions that must be closed by buying futures, said O.A. Cleveland, a consultant and agricultural economics professor emeritus at Mississippi State University.

March futures rose as much as 1.4% to US$ 1.1683 a pound in New York, the highest for a most active contract since June 2011. The gains were reined in later in the session by a rising dollar, which erodes the appeal of commodities priced in the greenback.

The fibre has been hard to ship amid transportation snarls. At the same time, farmers are facing increasing costs, including labour, fuel and fertilizer. Certified cotton stockpiles at depots monitored by ICE Futures US fell last week by 6.2%, extending this year’s slide to the lowest in more than a year. Logistical issues and a late US crop are hindering the ICE inventory from rebuilding, said Louis Rose, director of research at Rose Commodity Group in Tennessee.

Meanwhile, there are signs bigger supplies may be coming next year, with US farmers expected to plant significantly more acres. Other countries are already responding to the higher prices and upping output.

Even as the US lowered its estimate for world stockpiles, inventory is ample, said Jon Devine, supply chain economist for North Carolina-based researcher Cotton Inc., said in a note.  “Global supply estimates do not suggest a shortage, and a surplus of production could be expected” next season, he said.

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China’s new round of reserve cotton sales
China will start a new round of sales from its cotton reserves, with a total of 600,000 tonnes of imported and domestic cotton to be sold off in daily auctions, according to an official notice. It is the second batch of cotton to be released from reserves this year and is designed to better meet the demand for the fibre from spinning companies.

Global cotton balance sheet
Both production estimates for the 2021/22 crop year and ending stocks in the US were largely unchanged at 18.20 million bales and 3.40 million bales respectively, the USDA said in its November World Agricultural Supply and Demand Estimates (WASDE) report. “The global cotton balance sheet for 2021/22 includes higher production and consumption, and slightly lower ending stocks,” the USDA said.

Indian cotton prices continue to spiral
India’s cotton production in the 2021-22 season is likely to be 360.13 lakh bales of 170 kg each (equivalent to 382.64 lakh running bales of 160 kg each), which is more by 7.13 lakh bales than the previous season’s crop of 353 lakh bales, the Cotton Association of India (CAI) has said in its first estimate for the new season beginning October 1, 2021. In spot market, cotton gained by Rs 160 to end at Rs 32420.

Technically market is under fresh buying as the market has witnessed a gain in open interest by 0.81% to settle at Rs 3253 while prices were up Rs 660. Now cotton is getting support at Rs 32540 and below same could see a test of Rs 32160 levels, and resistance is now likely to be seen at Rs 33160, a move above could see prices testing Rs 33400.

In Guntur, cotton fetches Rs 10,000 per quintal as demand surges
While the cotton demand is rising across the world, the farmers in Guntur have no stock to sell due to poor yield. Due to inadequate production, price of quality cotton skyrocketed this season. Quality cotton is being sold at Rs 10,000 per quintal in the market which is a record price during this season. Cotton price has increased from Rs 7,500 per quintal to Rs 10,000 per quintal.

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If the situation prevails, prices may go up further and likely to touch Rs 12,000 per quintal mark. According to sources, cotton sowing area reduced to 100,000 acres in Guntur district due to lack of remunerative price for cotton during the last season. When the chilli price touched Rs 16,000 per quintal during the last season, cotton farmers shifted to chilli crop. Pink bollworm attack and unseasonal rains in the district worsened matters. As a result, the cotton yield was affected. Generally, farmers will get 15 quintals to 20 quintals yield per acre, but this season, the yield was down to 5-7 quintals per acre.

Punjab approves relief for cotton picking farm labourers
The Punjab Cabinet has approved a policy formulated for extending relief to cotton picking farm labourers affected by the damage caused to the crop by the pink bollworm pest attack. With this decision, 10% of the total compensation would be provided to the farm labourers affected by the pest attack on cotton crop, according to a government statement.

Pink bollworm attack had caused extensive damage to cotton crop in Mansa, Sangrur, Bathinda, Sri Muktsar Sahib and Barnala districts. The Punjab government last month announced releasing a sum of over Rs 416 crore to compensate cotton growers for their crop loss due to pink bollworm pest attack. Of this amount, 10% would be given to the cotton picking workers as relief.

Buoyant prices to obviate need for MSP: CCI
The Cotton Corporation of India (CCI) sees buoyant market prices precluding the need for a Minimum Support Price (MSP) operation during the current cotton season (October 2021 to September 2022). The CCI procured 2.5 crore bales during the last two cotton seasons in MSP operation and had just about 70,000 bales of cotton with it now, Chairman and Managing Director Pradeep Kumar Agarwal said. The total outgo for the MSP operation in the two seasons was almost Rs 70,000 crore. Cotton prices began looking up from February and had been high only for the last two months, he added.

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‘No intervention needed’
“It looks like farmers will not require our intervention now as the market prices are higher than MSP. In fact, farmers are expecting the prices to go up further,” Agarwal said. The CCI continues to sell the cotton stocks with it and may go for commercial purchase later if its stocks deplete, he added.

Rs 17408.85 crore for CCI
The Cabinet Committee on Economic Affairs’ has approved Rs 17,408.85 crore to CCI for committed price support for cotton seasons from 2014-2015 to 2020-2021. Of this, about 50% funds would be released this year and the rest would get a budgetary allocation in the next fiscal.

Over the last two seasons during the pandemic, the CCI procured a third of the country’s cotton production, paying 40 lakh farmers more than Rs 55,000 crore.

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