US$ 1 ICE Cotton With Tighter Indian Balance Sheet

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Vimal Verma is a cotton trader

ICE cotton, another roller coaster has been seen just one week before start of new season 2021-22 in India. ICE moved up sharply in consecutive two sessions and touched almost 100 USC (US$ 1) for its December contract. The discussion around 1 dollar cotton was there in the market during the 2020-21 season, which came true now when the season is almost over. Now uncertainties around ICE cotton are more than earlier, it can go in either direction sharply, following world fundamental, sentimental and technical moves. So, we need to be more proactive while entering in new trade at this stage. Trading activities are more on ICE December contract and factors such as price fixation and rollovers along with some funds activities have made it more volatile and this is expected to continue for the time being.

Friday’s (Sept 24) jump in ICE is believed to be based on rumours that China has confirmed a rather large purchase. Supporting this, in the latest Commitment of Traders Report, the trade is shown increasing their net short futures position by over two million bales. Nine times since 2006 has a larger one-week move been made. Currently, there are 4.9 million bales of on-call sales-based December that will provide additional price support. It is no surprise some of Monday’s (Sept 27) selloff was the result of fund liquidation. Their net long position declined from 9.1 million bales to 8.1 million bales. However, still well shy of their record high long position, we see this as a positive providing them more ammunition to move prices higher as fundamentals strengthen.

India’s cotton market is bullish
Continued good to heavy rains is being reported across cotton growing regions of the country. Some cotton crop damage has also been reported – North India, Madhya Pradesh and Maharashtra are the states that have reported heavy damage to cotton crop. In Northern India with rain damage, pink bollworm attacks could result in poor grade with comparatively lower yield. All these simultaneous events could double or even triple the net impact on prices and sentiments too.

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Till last week In India, the market was ruled by bearish factors, but the jump in ICE with continued rain in India has changed the market scenario currently. Going ahead we will have to keep close watch on percentage of cotton damage in India and ICE movement. Indian balance sheet could be tighter if crop damage results in lower crop numbers, consumption is expected to increase with new spindle capacities coming up. Continued lower prices for Indian cotton could result in higher exports, further tightening the balance sheet.

Indian cotton prices are approximately Rs 2000-3000 per candy higher than previous week (depending on quality). With bullish sentiments and more evidence and clarity on delay in new crop arrivals, there is good demand for 2020-21 crop cotton. New cotton crop prices have also surged with very limited forward selling. New crop arrivals are reported around 10,000-12,000 bales on all India basis per day, out of which majority is coming from northern India with high moisture, trash, and lower grade.

Spinners’ depleting cotton stocks
Many Indian spinning mills’ cotton inventories have depleted as mills were not buying aggressively in September due to price parity and less availability of quality cotton along with expectation of new cotton arrival on time and lower price prediction, which is not happening at least for now.

Inventories are thus expected to remain low for some time, and can also lend support to higher cotton prices. There is apprehension of lower production estimates with quality issues due to crop damage, if intense rains continue for a week or more. If the weather clears in the next 2-4 days without any heavy rains and wind, the damage could be lower.

Ginning picks up, CCI activity marginal
Ginning activity is expected to pick up in Gujarat, Madhya Pradesh and Maharashtra, as ginners expect good business from selling ginned cotton bales to traders and mills.

Meanwhile CCI’s buying activity will be subdued due to higher flat prices of seed cotton and cotton fibre. CCI received good demand from mills and traders for its daily auctions of 2020-21 procured stock. CCI was reported to have sold around 145,000-147,000 bales on 27th September after a long time.

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Other factors for upbeat market
USD-INR is trading in a decent range for the last few days, with no projection for any major moves. A factor for rupee to remain relatively weak is the steady rising trend in global crude prices. Last week the headlines concerning Evergrande and doubts over the Fed rate hike could be linked to the recent optimism in the market. Also, chatters that US policymakers are making progress on the much-awaited stimulus and the US Food and Drug Administration (FDA) approved Pfizer booster shot of the Covid vaccine for 65 and above, add to the upbeat sentiment.

US cotton export sales for week ending September 16, 2021
Net sales of 345,400 RB for 2021/2022 were up 21% from the previous week and 27% from the prior 4-week average. Increases were primarily for China (219,800 RB), Turkey (52,700 RB), Pakistan (36,200 RB), Vietnam (9,700 RB, including 3,700 RB switched from China, 500 RB switched from Japan, and decreases of 500 RB), and Peru (5,500 RB, including decreases of 100 RB). Exports of 176,800 RB were down 26% from the previous week and 7% from the prior 4-week average. The destinations were primarily to Turkey (36,000 RB), China (32,700 RB), Vietnam (25,700 RB), Mexico (22,700 RB), and Pakistan (19,700 RB).

Net sales of Pima totalling 23,500 RB were up noticeably from the previous week and up 86% from the prior 4-week average. Increases were primarily for India (16,000 RB), Peru (2,400 RB), Turkey (1,500 RB), China (1,300 RB), and Greece (900 RB).  Exports of 3,800 RB were up 23% from the previous week, but down 45% from the prior 4-week average.  The destinations were to India (2,800 RB), China (500 RB), Peru (300 RB), and Pakistan (200 RB).

Optional Origin Sales:  For 2021/2022, the current outstanding balance of 8,800 RB is for Pakistan.

2020-21 witnesses record cotton imports
The year 2020-21 has witnessed record cotton imports across the world markets. Global suppliers such as the US could generate decent revenue through exports. Vietnam turned out to be the largest destination for US cotton for the first time in six years at more than 5 million bales. Almost two thirds were purchased by China, who seem determined to honour their previous commitments or are in desperate need of cotton. These sales figures are prior to Monday’s dip in prices which is certain to stimulate additional sales.

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The US exports in 2020-21 were the highest in 15 years at 16.4 million bales as per the USDA (US Agriculture Department). There were record US shipments during the month of December which contributed to enhancing the overseas sales figures. Despite US 2020/21 production falling by 5.3 million bales from the previous year, the country could export a heavy quantity to China.

Bangladesh, Vietnam, Pakistan, and Turkey, emerged as the top five global importers (China being the largest), all estimated to have imported record quantities in 2020/21. Higher yarn prices and rising global demand for cotton products spurred imports and cotton consumption. Brazil and India could export healthy volumes to these respective markets; Brazil’s 2020/21 exports exceeded the previous year’s record by roughly 2 million bales, and India is projected to register its highest exports in seven years. US 2021/22 exports are estimated lower from the previous year at 15.5 million bales by the USDA, despite a larger crop at 18.5 million bales.

(Vimal Verma is a cotton trader)

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