Cotton Market Update May 2022

Posted on 17th May 2022 by NBHC Research Team

Current fundamental & Its impact

Price Drivers Impact on Domestic prices
International prices at 11 years high Sentiments Booster for Indian Cotton (+ve)
Lower domestic production Creating concerns for future supply (+ve)
Govt allowing Duty-free import policy till September 30, 2022 May improve supply situation in India (-ve)
Possibility of a temporary ban on cotton exports by the government. Beneficial for domestic stakeholders (-ve)
Good export Demand Can add to domestic supply shortage (+ve)
Major cotton producing region in the U.S., facing worst drought conditions in decades Supportive for US cotton & in turn for India (+ve)
25% lower Mandi arrivals Validating lower production concerns (+ve)
Speculative buying in cotton Strengthening demand side (+ve)
Based on Primary & secondary Sources
  • Recently, US Cotton futures prices soared to their highest levels since May 2011 to 155.93 cents per pound, up nearly 15% from a month earlier and roughly 35% from the start of the year.

  • In its last release, The CAI has reduced its cotton crop estimate for the 2021-22 season by 8.00 lakh bales to 335.13 lakh bales (of 170 kg each) from its previous estimate of 343.13 lakh bales.

  • Government, in effort to cool domestic cotton prices, fully exempted the Import of cotton from customs duties till September 30, 2022, a move which will also benefit the textile industry.

  • There are market rumours that India, which accounts for more than 10% of global cotton exports, could temporarily suspend exports.

  • Minister for Commerce & Industry and Textiles has called a meeting of all cotton stakeholders as garments industry producers are seeking a ban on cotton export.



International market

New York cotton futures have recently touched a high of 155.95 cents per pound, a level last seen during May 2011, triggered by the expectations that over a possible export ban by top exporter India and a severe drought hitting U.S. yields. Dry weather conditions in the U.S. which are threatens to hit yields may make matters worse. According to the U.S. Drought Monitor, large parts of major cotton-growing state Texas were in "exceptional drought" conditions. Moreover, Speculation of farmers cutting back on cotton to grow more soybeans in response to food shortages spurred by the Ukraine war has pushed prices higher as well.


Domestic Scenario

Cotton being an international commodity, surged following the US benchmarks. Domestic supply tightness and higher export demand contributed to the strength. With price trend looking well established for some time, apparel makers face the prospect of persistently higher costs, which could push the commodities-driven inflation further. A slump in domestic production, as a result of excessive rain in cotton-growing areas affecting output in India, on top of rising commodity costs, has driven up apparel prices in India, contributing to inflation.


Demand Supply situation

In its recent notification the CAI has reduced the production estimate for cotton crop for 2021-22 by 8 lakh bales or 2.33 per cent to 335.13 lakh bales. The changes made in the state-wise production is shown in Figure 1.0. CAI estimated the opening stock at 75 lakh bales at the beginning of the season. The total cotton supply till end of the cotton season 2021-22 was estimated to decline by 8 lakh bales to 425.13 lakh bales. The domestic consumption will remain unchanged at 340 lakh bales, while the exports for the season have been estimated at 45 lakh bales.

Infrastructure and Development Cess (AIDC) on the imports (amounting to a total of 11% taxes) on cotton imports till September, aiming to encourage purchases from abroad to make up for domestic shortages, but it has not boosted India’s cotton imports as international prices continue to rule around an 11 year high.

Textile manufacturers, exporters seek more government intervention as removal of import duty has not shown its impact as desired. A section of the cotton-based textile and garments industry producers calling for a ban on its export or else threatening to go on strike against the continually rising raw cotton and yarn prices.

For the next season, Cotton sowing is expected to increase by 15-25 per cent with farmers in states like Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh, Madhya Pradesh and Punjab shifting from other crops to cotton owing to the record high price received this year.


Price Review & Outlook

Cotton futures prices at MCX were seen caught in a long term channel since long. Prices tried to invalidate the upper band of the channel on multiple occasion, but were unsuccessful and invited seller’s interest every time. Finally, with strongly supportive domestic fundamentals and surging international prices the channel gave up to the strength of the counter and was successfully taken out in the month of September 2021 at a price of around Rs 25000/Bale.

Since then the prices have never looked back and continued the northwardly surge. Despite being over 200% up from where the upward journey first started in May 2020 (Rs 15630) and over 90 percent above the mark from where it broke the channel in Sept 2021 (Rs 25060), the prices are not showing any signs of cooling off.

Although the US futures, which is being followed by the Indian prices, have started showing signs of tiredness at the 11 year high levels of around 156 cents/pound. However this seems to be a short lived phenomenon and its just the matter of time when the prices take up its recent directional move once again.

Similarly Indian Prices, which showed disconnect with its US peer, and haven’t slipped last week in line with the slide in the US prices are looking well poised to extend its winning streak in the coming weeks as well. A level of Rs 49800 seems a possibility in the weeks to follow. Rs 50000 may act as a psychological resistance but development on the fundamental front and fruits of government’s efforts to tame the prices, which are badly hurting the domestic stakeholders will decide the fate of the prices in the slightly distant future.

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