Washington D.C., Aug 31 Indian cotton is likely to turn out to be an exceptional performer in the ensuing kharif season, despite drought-like conditions afflicting nearly half the country.
An increase of over 10 lakh hectares in area under cotton cultivation has generated hopes of a bumper crop for 2009-10. As of August 20, the total area under cotton was an estimated 94.9 lakh hectares, up from 84.5 lakh hectares during the same time last year. Some observers assert that the final cotton area for the season may well exceed 100 lakh hectares.
In the event, it should come as no surprise if India produced over 300 lakh bales and set a new record for 2009-10. Importantly, it would make available sufficient raw material for the domestic textile industry as well as open up opportunities for export. Quality of produce is of course a key variable that needs to be tracked closely.
Global trend
In the international market, 2009-10 will see a tightly balanced production and consumption.
According to the International Cotton Advisory Committee (ICAC), world production is forecast at 23.6 million tonnes (mt) and consumption at 23.5 mt. Generally, in a tightly balanced market, even a small change in either demand or supply would have a disproportionately larger impact on price.
But for the coming season, world inventory is expected to be high. ICAC has put ending stocks at a record 12.7 mt. That should weigh heavily on the market and cap any upside if there are unexpected supply side developments.
World cotton exports are unlikely to show any significant rebound from 2008-09 level of 6.4 mt. For 2009-10, ICAC has forecast 6.8 mt, a modest 7 per cent increase because of anticipated increase in China’s import requirement. India may be a beneficiary of the small expansion in global exports.
Because of unprecedented volatility in the cotton futures market in 2008, several international trading houses lost heavily and had to shut down operations.
Price outlook
In addition to the ongoing economic slowdown, absence of several large players in the world trade is seen impacting cross-border business.
Given the market fundamentals, the season average Cotlook A-Index is expected to remain unchanged at 60 cents a pound, ICAC has forecast using its own model.
However, a couple of issues may need closer attention. For one, the US dollar has turned decisively weak. While foreign exchange strategists expect it to stabilise in the short run, the greenback is widely seen to weaken further from the current levels going a few months forward. A weaker dollar will push commodity prices up.
The second factor is the return of risk appetite. Speculators are returning to the futures market in sizeable numbers. It is evident in several commodities including energy, metals and agriculture. Admittedly, in the immediate future, cotton is widely expected not to attract substantial speculative capital that could decisively propel prices higher. Yet, for any reason, if there is a directional change to prices, it is to the upside.
Weather related uncertainties in the coming weeks or supply disruptions cannot be ruled out. On current reckoning, the downside to prices appears limited.
The possibility of Indian cotton exports rebounding is rated high. A weak rupee makes exports attractive. Also, it appears most likely that the Government of India will not raise the minimum support price for cotton.
Local deals for December/January deliveries are already being made in line with trade reports.
Source : Business Line