Lower Cotton Market Fundamentals Are Dominating

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All India daily cotton arrivals have crossed 275,000 bales, touching 300,000 bales, putting pressure on cotton prices. Cotton prices are under pressure, even as CCI is reportedly buying approximately 200,000 bales of cotton per day, at MSP.

The new cotton season 2020-21 started with lot of positive vibes for good trade and win-win situation for the complete value chain. Market prices of cotton and seed cotton both kept rising, with farmers and ginners/spinners enjoying good margins on yarn.

Bearish cotton market has traders worried
But this continuous rise in cotton prices was somewhere not in line with market fundamentals of cotton across the globe. Despite huge supply of cotton in India and worldwide, against steady consumption pattern, Indian cotton prices kept rising with good demand reported in export and domestic market. This demand was actually in view of CCI’s aggression to buy new crop at MSP, and expectation of good demand of cotton after Covid-19 situation. Also, crop damages were reported due to pink bollworm, which lowered crop estimates.

From last two weeks, cotton market was bearish. ICE Cotton, ZCE and Cotlook-A index came down considerably after continued uptrend from start of the season. A similar trend is witnessed in the Indian market – for both physical cotton prices and futures. Traders/ manufactures carrying cotton in view of bullish trend are now worried about the downtrend. Gujarat market is trading its 29mm & 75 RD around Rs 40,500 per candy which came down from Rs 42,500 per candy in the last 15 days.

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Cotton arrivals pick up
Last week, all India cotton arrivals were reported around 1.6-1.7 million bales and total all India arrival for the season is estimated around 9.2-9.5 million bales. Total exports are estimated at around 1.6-1.8 million bales. Till now, consumption within India is reported around 6.0-6.5 million bales. CCI bought seed cotton equivalent to 3.50 million bales till now for 2020-21 season.

Market sources report all India cotton production at around 34-36 million bales vs 37-39 million bales of previous wider estimates. The lower estimates are despite the record acreage. Lower production is mainly attributed to sharp decrease in yields on the back of adverse weather conditions amid pink bollworm attack. Insect infestation in some parts of Saurashtra led to  early crop uprooting by many farmers.

Cotton harvesting in northern India is almost complete. Yield is reported lower from initial estimates with major decrease in north India, Telangana and Gujarat. Indian cotton prices should stay export competitive for the rest of the season, with high opening and closing stocks. This will prevent the price crash like situation of the previous year.

CAI latest estimates
CAI crop committee released statewise crop figures in a meeting held on December 5, 2020.

CCI MSP procurement till 07-Dec-2020
Procurement operations of seed cotton under MSP are going on smoothly in the states of Punjab, Haryana, Rajasthan Madhya Pradesh, Maharashtra, Gujarat, Telangana, Andhra Pradesh, Odisha and Karnataka. Till December 7, 2020, a quantity of 4.1 million cotton bales has been procured benefitting approximately 0.8 million farmers.

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China will source top quality cotton from US
Chinese demand for Indian cotton plays a vital role in determining Indian cotton prices. China’s trade war with Australia is getting further away from a solution. Also, some international are trying to avoid Xinjiang origin cotton. So Chinese demand for top grade US cotton is likely to remain strong.

The active demand in China we witnessed in October has now slowed down, as the traditional slow season in the domestic market is approaching and export orders are suffering from fears of renewed lockdowns in Europe. There are reports of smaller mills reducing their operating rate.

The political outlook has at least stopped deteriorating with the outcome of the US election; unfortunately China now insists on starting its own trade war against Australia at a considerable cost to the Chinese industry which must now pay more for raw materials (like coal) from other origins. Specifically, the textile industry is seriously concerned about the supply of high-grade cotton.

US cotton export sales for week ending 26/11/2020
Net sales of 277,900 RB for 2020/2021 were down 22% from the previous week, but up 33% from the prior 4-week average. Increases were primarily for China (130,800 RB), Vietnam (46,000 RB, including 4,600 RB switched from China and decreases of 5,800 RB), Pakistan (44,500 RB), Turkey (12,500 RB), and Indonesia (11,100 RB).

For 2021/2022, net sales of 21,800 RB were for Vietnam (15,400 RB) and Mexico (6,400 RB). Exports of 180,800 RB were down 1% from the previous week and 29% from the prior 4-week average. Exports were primarily to China (80,300 RB), Vietnam (27,500 RB), Pakistan (17,000 RB), Bangladesh (12,000 RB), and Mexico (11,700 RB).  Net sales of Pima totaling 7,900 RB were down 71% from the previous week and 54% from the prior 4-week average. Increases were primarily for Peru (3,500 RB), Vietnam (1,800 RB), Honduras (1,200 RB), and Bangladesh (900 RB).

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Exports of 27,600 RB – a marketing-year high – were up 27% from the previous week and 31% from the prior 4-week average. The destinations were primarily to India (12,400 RB), China (7,400 RB), Pakistan (4,100 RB), Vietnam (1,600 RB), and Thailand (1,000 RB).

(Vimal Verma is a cotton trader)

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