ICE Up On US Cotton Crop Concerns, But Indian Cotton Prices Stay Put

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Indian cotton prices are trading range bound, even as ICE recently moved to a four month high. However, ICE is now trading lower than this recent peak. Indian cotton market is almost disconnected with ICE for the time being due to high cotton surplus and low demand in India and worldwide.

Indian cotton is the cheapest in the world today, but there is hardly any demand for the fibre, as the industry is in slow recovery. Worldwide, stock markets are doing well, though fundamentally it’s difficult to accept such higher move in ongoing Covid-19 era.

If the situation does not improve then stock markets can come down once again. We are awaiting 2nd quarter results, If results are not as per expectations, markets can take a U-turn. In India,daily cotton arrivals in the market are around 40000-45000 bales. Mills’ daily consumption is reported at 60000-65000 bales, which is approximately 65-70% of their capacity.

Domestic cotton prices are 14-15% below international prices. Huge supply and steady to weak demand can create more pressure on Indian prices. Overseas, ICE cotton futures remained under pressure retracing the Friday gains when USDA July monthly was released. The marginal pullback on ICE futures could have been due to some profit booking with front month failing to scale the 65 cents level in  short term.

Factors which are in limelight for deciding movement in cotton trade are majorly CCI, Covid-19, China’s state cotton auction policy, lower planted areas of US cotton than anticipated, locust in India and lower consumption with higher ending stocks. Under these influencing factors from supply side, the weakness in downstream market is not even being considered by analysts.

CCI struggling to liquidate its stock
CCI has reportedly sold approximately 50,000 bales of 170 kgs each from its stock. This is a very small amount, compared to the total cotton quantity that CCI has to sell. Recently CCI floated export offers as well, but till now no confirmed order has been reported.

It is expected due to confidence on quality and delivery assurance as per contract, international mills can take interest to buy, but same time payment term for selling internationally would be a challenge for CCI. If CCI is unable to sell cotton in International and domestic markets, and liquidate its stocks, it will have to reduce the base price without giving a second thought. CCI has slowed down its MSP buying operations across the country. There was no change in auction floor price today vs prior few sessions, for both 2018-19 & 2019-20 growths.

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Sowing with good monsoon and locust effect on cotton
Indian monsoon is spreading very well across the country. Farmers are sowing cotton and other crops aggressively. Indian cotton sowing covered higher acres than last year, it completed 10.48 million hectares till date against 7.77 million hectares same time last year.

Gujarat cotton sowing reached to 1.83 million hectares. Despite higher sowing of cotton as of now, sowing area of cotton is expected to come down in Gujarat and Maharashtra.

On locust front, as per reports there was considerable damage to crops in Haryana. Though the impact of locusts on Indian cotton is supposed to be very limited. Recently, locust was found around the cotton growing areas in North India.

With the monsoon rains, the locusts have not reached the central or southern cotton growing areas as forecast. In addition, due to the early arrival of monsoons, the progress of cotton planting in India has accelerated. According to the weather forecast, rainfall will be good in India, which boosts cotton planting progress.

China’s scenario
China’s state reserve absorbed surplus domestic cotton and supported well local prices in China. State reserve activities are continuously affecting Chinese imports. Right now, China’s spinning mills are mostly using domestic cotton. Operating rate of spinning mills is still stagnating at the historically low level of last year. In spite of the reduced operating rate, spinning mills have historically high yarn stocks, about 30-35 days of production.

Brazil crop progress
Outlook for current crop is good, In many cotton growing regions harvest is continuing. Due to cold weather It’s not advancing as fast, but yields and quality are expected to be good. The projection for next year 2021 is a bit better than last fortnight now. At current price levels and exchange rates, Brazilian farmers can survive, and planted area is likely to shrink by roughly 8-10%.

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The latest USDA crop estimate of 2.61million tons looks feasible. The Covid-19 epidemic continues to hurt the country very badly. Things are finally looking a bit better in the main coast cities. Although overall daily new cases in Brazil are now falling on a consistent basis. There is a shortage of farm workers.

US crop concern continues
The most influential factor on the supply side is US cotton. In its June acreage report, USDA estimated planted cotton acres at 12.2 million acres for 2020, down 11% from last year. But if the reduction of harvested areas is smaller than that of planted areas, the cotton production may not reduce much. By now, the progress of cotton squaring and setting bolls is normal.

The market is currently more concerned about the drought in the cotton planting area of Texas. The good-to-excellent ratio of US cotton crops is lower than the same period last year, while the ratio in Texas declines from 23% to 21%. At the same time, if China stops purchasing US cotton after completing the Phase One Trade Agreement, the pressure on ICE cotton will appear again.

Weather concerns are slowly rising around the West Texas areas. Rainfall can bring minimal relief from the drought due to the extreme conditions the region is currently experiencing.  Both the 6-10- and 8-14-day forecasts predominantly call for above normal temperatures and below normal rainfall for the high plains so currently no end in sight.  No one is arguing the crop is getting much smaller in the largest producing state in the U.S.

US EXPORT SALES FOR WEEK ENDING 7/2/2020
Net sales of 43,800 RB for 2019/2020 were down 35 percent from the previous week and 74 percent from the prior 4-week average.  Increases primarily for China (22,000 RB), Malaysia (8,800 RB, switched from China), Vietnam (8,700 RB, including 2,400 RB switched from Japan, 1,400 RB switched from South Korea, and decreases of 1,300 RB).

Exports of 329,300 RB were up 19 percent from the previous week and 7 percent from the prior 4-week average.  Exports were primarily to China (112,400 RB), Vietnam (61,100 RB), Turkey (47,600 RB), Pakistan (36,200 RB), and Bangladesh (20,200 RB).

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USDA WASDE report
The US 2020/21 cotton projections show lower production, exports, and stocks compared with last month. Beginning stocks are 200,000 bales lower due to higher 2019/20 exports, but exports in 2020/21 are reduced 1 million bales as a 2-million-bale decline in projected output reduces exportable supplies. U.S. planted area is 1.5 million acres lower this month, as indicated in the June 30 Acreage report. Ending stocks are projected at 6.8 million bales, 1.2 million lower than in June, and equivalent to 38 percent of use. The projected price received by U.S. upland cotton producers is 59 cents this month, 2 cents higher than in June.

Global projected ending stocks in 2020/21 are lower this month as well, down 1.9 million bales, largely due to a 2.5-million-bale reduction in projected world production. While the United States accounted for most of the global decline in production, projections were also reduced for Turkey, Tanzania, and Mexico, more than offsetting a 200,000-bale increase for Pakistan. Consumption in 2020/21 is projected 115,000 bales lower this month. At 114.3 million bales, consumption is expected to rise 11.7 percent from the previous year’s recession-reduced level.

USDA weekly crop progress report  as of Jul 13 showed that 44% of crop was in good  to excellent conditions vs 43% in prior week and 56% last year same time. Total crop in poor to very poor bracket was at 26% vs 23% in prior week and 15% last year. In Texas, the largest cotton grower in US, 41% of crop was rated in poor to very poor conditions vs 36% last week.

(Vimal Verma is a cotton trader)

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