Indian Cotton Prices Surge On US Crop Concerns, CCI’s MSP Operations

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Cotton Dips Lower With Corona Virus Fear

Indian cotton prices are moving up. Firm ICE, adverse weather in India (last couple of weeks) and aggressive MSP procurement operation by CCI in Northern India despite huge ending stocks, are the reasons for the rising cotton prices.

More importantly, rising cotton demand for nearby deliveries specially from local mills and for export markets have charged up the cotton economy and good cotton trading activities were reported across India.

CCI raises base price of old cotton
Strategically, CCI kept raising its base price for selling older cotton by Rs 100-300 per candy everyday depending on market scenario. This continued rise in base price too  supported the higher market price, even as daily crop arrivals are increasing. However, CCI was unable to make any major sale during the last fortnight.

Daily arrivals for new crop have already crossed 100,000 bales per day, still 2019-20 crop is in the market and some ginning factories are running to gin older seed cotton. During October also good demand has been reported for older cotton in the export market, despite new crop dominating heavily in daily arrival numbers. The major reason for demand for older crop cotton is the price difference of around Rs 1500-2000 per candy, which is equivalent to around USC 3-4 cents per LBS discount over new crop.

Currently, prices for Shankar-6 variety (29mm/75RD/3% Trash/ 10% moisture), the benchmark for exports to the global market, are ruling at Rs 39800-40200 a candy (356 kg). Moisture is expected to reduce to 9% from November first week. In terms of MSP, prices should be ruling at around Rs 47500- 48500 (depending on cotton seed price and outturn).

Cotton exports expected to be higher than last season
With the easing of the lockdown and the economy slowly getting back on track, demand has picked up and spinning mills are now operating at 90-95% of their capacity, which will certainly lead to an increase in consumption for the season 2020-21.

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This season, cotton exports are expected to be higher than last season’s 5 million bales. Two advantages Indian exporters have are lower freight to destinations such as China, Bangladesh, Vietnam and Indonesia, besides offering consignments in smaller vessels.

Cotton sowing trends in 2020-21
The Ministry of Agriculture has estimated the area under cotton this year at 129.50 lakh hectares against 133.73 lakh hectares last year, down 2%.

Sowing in Gujarat under cotton slid to 2.3 million hectares this year from 2.7 million hectares last year. With over 28% share in the total production of cotton in the country, Gujarat is one of the leading states in cotton trade. Due to the Covid-19 pandemic, many cotton growers have diversified to groundnut and hence, sowing in the state is almost 15% lower in the current season compared to last year. Gujarat is exporting 12 lakh to 15 lakh bales of cotton every year. In current season also the trend should continue despite the pandemic.

Cotton output in Telangana, the largest producer of the crop among the southern states, is seen rising 45-46% on year to 9.95 million bales in the 2020-21 season from 6.83 million bales of 2019-20 season due to likely rise in yields (each bale 170 kgs), according to first estimate released by the state’s farm department.The cotton yield is expected to rise to 700 plus kg per ha from 545 kg in the previous year.

Higher cotton stocks could keep prices subdued
CCI has approximately 5 million bales of last season’s cotton stock with it. The CCI has proposed to purchase around 12.5 million bales, which could further increase the stocks with the Corporation. Existing 2019-20 stocks with the CCI and available cotton in open market from 2019-20 season are already weighing down prices.

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A record carryover of 10.80 million bales (170 kg each) against 3.4 million bales in previous season of cotton this season can put pressure on the commodity’s prices and prices can keep trading below MSP during the whole current season. Procurement operations of seed cotton (kapas) under MSP are going on smoothly in Punjab, Haryana, Rajasthan and Madhya Pradesh.

US Crop Vs. ICE – 1.5 years high
Renewed buying from Asian countries is anticipated as those countries seem to be faring much better with the virus.

In the US, West Texas, an important cotton growing region, has witnessed heaving snowing. Fortunately, the weather is expected to clear up soon, and temperatures could be warming up, allowing harvest to resume in the coming days. Zeta has gained hurricane strength once again and made landfall in Louisiana as a category 2 hurricane.  Its path over land will take it over most of the Alabama crop which is less than 50% harvested.

US predicted short crop, which is causing the market to shoot higher as we move into harvest season. Unfavourable weather in cotton-producing regions of the US, one of the world’s largest raw cotton producers, has weighed on production.

The US harvest is expected to be near 17 million bales of cotton, down from about 20 million bales forecast in the spring. That would be the weakest year since 2015.

Cotton prices have reached their highest levels since before the pandemic started, lifted by poor weather in the US and steady demand from heavyweight importers including China. Cotton futures traded around 70.9 cents a pound in early trading on October 28, after settling at an 18-month high of 72.11 cents on October 26. Prices have gained about 7.7% over the past month, the largest monthly increase since April.

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USDA’s weekly crop progress report showed that 40% of crop was in good to excellent conditions and 34% was in poor to very poor conditions. In Texas, 44% of crop was in very poor to poor conditions. 44% of the crop was harvested vs 42% last year same time and in line with the five year average.

US export sales for week ending October 15
Net sales of 227,800 RB for 2020/2021 were up noticeably from the previous week and up 51% from the prior 4-week average. Increases primarily for Pakistan (93,300 RB, including 800 RB switched from Indonesia), China (47,500 RB, including decreases of 10,600 RB), Mexico (33,800 RB), Vietnam (30,100 RB, including 1,100 RB switched from China and decreases of 100 RB), and Bangladesh (9,000 RB), were offset by reductions primarily for Japan (1,000 RB) and Indonesia (800 RB).

For 2021/2022, net sales of 21,300 RB were for China (17,200 RB) and Mexico (4,100 RB).  Exports of 194,100 RB were up 1% from the previous week, but down 7% from the prior 4-week average.  Exports were primarily to China (95,500 RB), Pakistan (29,100 RB), Vietnam (16,200 RB), Indonesia (12,600 RB), and Bangladesh (12,000 RB).

(Vimal Verma is a cotton trader)

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