Bales of opportunity for cotton

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February 16, 2014:  

Cotton prices are on the rise in India again. But any significant medium-term improvement depends on a Government rethink on export controls. Increased demand from domestic mills have stoked cotton prices in the last ten days. Prices have increased by 22.5 per cent to Rs21,977 per candy.

However, prices are still down 2 per cent from levels seen this time last year. As long as the Government continues to maintain controls on export of the valuable raw materials for clothes, the prospects of long-term gains in cotton remain sketchy. Cotton futures, though on an uptrend on the MCX now, trail spot prices.

Output estimates

Cotton production in the 2013-14 crop year (which commenced on August 1) received a boost from the strong monsoon in 2013.

The country is expected to produce 36.1 million bales of cotton in 2013-14, according to the latest US Department of Agriculture estimates. In India, a bale of cotton amounts to 175 kg, but globally, a bale is calculated as approximately 218 kg. Consumption, on the other hand, is tipped to rise to only 28.7 million bales. This would leave a surplus of around eight million bales available for exports, acting as a potential driver of prices.

With the rupee trending weak against the US dollar, there is a growing rationale for exports to capitalise on the depreciation.

But the Agriculture Ministry’s refusal to issue Open General Licence for cotton exports effectively closed this route for domestic producers, with the additional availability depressing prices.

The states of Gujarat, Maharashtra and Andhra Pradesh are the major producers of cotton in India, accounting for 75 per cent of the country’s total output. India is currently the world’s second-largest exporter of cotton.

Global scenario

Global prices of cotton have been on the rise as well. Prices of cotton see-sawed violently in 2013; they rose sharply in the first half of the year only to witness a reversal in the latter part.

In 2014, they witnessed a recovery and were up 0.7 per cent on the US-based Intercontinental Exchange during the year to February 14. This is because global production of cotton is expected to have declined in 2013-14 amid unfavourable weather in key producing countries, such as China. The US Department of Agriculture has pegged global production of the crop at 116.83 million bales in 2013-14, down 3.9 per cent in comparison to the previous year.

On the other hand, global demand for cotton has risen. The USDA has projected a 2.2 per cent increase in consumption of cotton worldwide in the 2013-14 season to 109.8 million bales.

This is likely to result in tightness in the international supply situation, presenting an enormous opportunity for Indian cotton growers to reap a good price for their produce, if the Government permits it. Prices of the commodity are down significantly from the high of $2.15 per pound (Rs1,06,678 per candy) seen in April 2011.

The slowdown in China, however, could have a bearing on the commodity’s fortunes.

Outlook

MCX Cotton (Rs20,710) futures contracts have been in a strong uptrend ever since they touched a low of Rs18,210 in November 2013. Immediate support is seen at Rs20,641, the 21-day moving average. Subsequently, the 200-day moving average, currently at Rs20,251, is a key short-term support for the contract that can limit any downside.

While above these support levels, the contract can rise to the short-term target of Rs21,620.

 For the medium-term, Rs21,620 — the 61.8 per cent Fibonacci retracement level — will be the crucial resistance to be watched for the contract.

Whether this resistance gets breached or not will decide the medium-term trend. A breach of Rs21,620 could take the contract to Rs23,000. On the other hand, a reversal from Rs21,620 might drag it lower to Rs20,500 or Rs20,300 over this time period.

Source: The Hindu

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