Cotton spot to breach Rs, 45,000 per candy threshold

Brief: SMERA expects Cotton spot prices to breach the Rs. 45,000 per candy threshold in June-July FY18; Not included in the Essential Commodities Act, the commodity remains dependent on the vagaries of international scenarios, especially benchmark US Cotton Futures; Demonetization also disengaged the supply chain temporarily restraining domestic supplies

Impact: Negative

At Rs. 43,013.2 per Candy, Cotton Spot Prices remain over 20% higher than same time last year. Despite availability of adequate buffer stock, prices continue to be higher than normal at this time. Further, the rise in Cotton futures has been a major concern since the current forecasts do not justify a supply constraint. It is now clear that benchmark US Cotton Futures are the source of this turmoil. High demand of US Cotton is driving up demand and diminishing supplies so much so that analysts expect a crises type situation by September 2017.

In domestic markets, since Cotton is no longer classified under the Essential Commodities Act, the rally is having an inverse impact on India. Also, we continue to believe that the demonetization exercise has had a negative impact on supply as cash crunch temporarily disengaged the supply chain. Farmers were unable to trade their produce, it became difficult to meet contract obligations- creating a shortfall. Prices as a result increased and farmers have been hoarding the agro commodity in order to push prices further up. Given the current situation, we expect spot price of Cotton to breach the Rs 45,000 per Candy level in June-July period, when most contracts are serviced. However this level maybe temporary as anticipated Kharif supplies will cool the markets but prices may remain over Rs. 40,000 this year. According to our earlier estimate, prices were to stabilize at Rs. 38,000-39,000/ Candy level by March 2017 as supply resumes and the situation is normalized. The current situation in the US has however inflated prices further.

For FY18, SMERA continues to expect yields to go up by 10% in the current cycle as well and peg production to exceed 36 million bales - easing the situation to an extent. Last year, there was a decline in sawn area as only 10.25 million hectares was under Cotton cultivation. Considering the healthy rate of sowing due to higher prevailing prices, we believe that this year, area under cultivation may rise to over 12 million hectares. The stickiness due to a demand-supply mismatch will however remain due to higher international prices insulating domestic demand. This in turn will mount pressure on the already under pressure domestic supplies, keeping prices higher than normal. The current prices will put pressure pan industry (Textiles) as it will be difficult to offload the higher price burden to the end consumers. Textile sector has been under significant margin pressures lately; leverage levels are substantial as well. Therefore, higher Cotton prices are expected to have collective impact on operating margins since benefits provided by forward positions may be limited in the current scenario.

Impacted Sectors:

  • Textiles- Ginning
  • Textiles- Spinning
  • Textiles- Finishing Industry
  • Dyes Industry

 

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