Commodity Online
The cotton markets in 2008 witnessed wide fluctuations, with prices touching historic highs only to tumble by nearly 40 percent towards the end of the year ,closing the year 15 percent lower than January 2008 levels. Prices however, were relatively firm during the last month of the year even as weak economic data and pessimistic economic news poured in weakening sentiments of market participants.

According to a report from India's National Commodity and Derivatives Exchange (NCDEX), the relative stability in prices in December can be attributed to the support provided by government agencies of China, Pakistan and India- the biggest buyers of new crop arrivals.

" The weakness in the U.S. dollar also contributed to the firmness of cotton prices. Physical demand i.e. mill demand however continued to be extremely depressed in December implying very depressed demand for textiles. Falling textile production in China, India and Pakistan has led to the build-up of inventories at Asian plants which is in turn pressuring yarn prices. Concerns over raw cotton consumption were heightened amid a slew of reports of severe fall in retail sales in major western consuming
centers," says the report.

The US export sales have registered volumes to the tune of 300,000 bales, around half the volumes of that a year ago. The prevailing credit crunch is adding to the woes of the cotton sector, especially, of spinners. The non-availability of credit and lack of cash liquidity has made it difficult for many of them to execute contracts. The attraction towards the sector is waning steadily.

Farmers have been increasingly shifting from fiber crops to food crops. Lower realization to farmers in the current season is expected to lead to a further reduction in plantings in the 2009/10 season.

Price Movement

Cotton prices were relatively stable for the most of December, but ended the year 15 percent lower. The Cotlook “A” Index touched a low of 53.10 cents/lb during the second week of the month, rebounding thereafter to end the month at 57.20 cents/lb.

The Cotlook “A” Index represents the offering price of raw cotton in US cents per pound in the international raw cotton market and is calculated from the prices at which cotton is offered to the final consumer i.e. mills. It takes into account the simple average of the day’s 5 cheapest Far Eastern quotations from a selection of nineteen growths of cotton traded internationally.

Demand

Global cotton demand this season has fallen drastically. The fall in demand from China alone is being estimated at around 24 percent. China’s imports in the first 10 months of 2008 reportedly fell by 8.3 percent from that a year ago as the severe weakness in the country’s textile industry, the aftermath of the global financial turmoil, slashed cotton demand.

However, despite the bleak demand scenario, the current cotton crop has buyers. The demand for the new crop is coming by way of state buying in the some of the largest textile producing countries viz. India, Pakistan and China. The move has been supporting prices, thereby artificially raising prices of the raw material and adding to the depression in textile production.

Domestic Scenario

The government agencies have been the major buyer of raw cotton this season. The agencies have as of end December ‘08 reportedly procured at the MSP (which was raised by 40 percent this year) 48 lakh bales of cotton, about 46 percent of the total supply of cotton in the market. The aggressive state buying has raised concerns of the creation of artificial shortages by the
procurers and of domestic prices continuing to be at a premium to world prices.

The state agencies such as CCI, the main buyers of cotton, have been selling cotton at marginally lower rates than the MSP, making its difficult for the beleaguered industry to buy it. The industry which has all along been resisting the high support prices has been finding it increasingly difficult to directly buy from the market (the difference between the market rates and the MSP
is as high as 20-25 percent).

Farmers too have been reluctant to off -load produce in anticipation of an increase in prices. On the other hand, the cotton markets have also been witnessing a huge build up of cotton stocks with mills continuing with their “need based purchase” policy. The massive buying by government agencies, which has resulted in domestic prices being 6-7 percent higher than that in international markets, has adversely affect exports of cotton, yarn, textiles and apparels from the country. Overseas importers have been seeking other sources of supply.

Cotton arrivals this season have been lagging compared to that in the previous year, largely on account of lower arrivals from Gujarat (the largest cotton producing state in the country), unfavorable weather conditions and pest infestations. With the pace of arrivals being unimpressive, the likelihood of the crop production forecast (by the CAB) of 32 million bales for 2008-09 being achieved seem far fetched. Market participant expect cotton crop volumes for the current season to be in the range of 28.5-29 million bales.

India Cotton Futures

The futures market for cotton continue to move in the downward direction, indicating that prices are not going to rebound in the near term. Prices for the ongoing contracts trading on NCDEX have fallen by 8-10 percent. The price decline in the Shankar Kapas variety traded on NCDEX was about 1.5-2.5 percent during the month.

Outlook

In the absence of any sign of an improvement in the demand situation in the coming months, cotton markets/ market participants do not anticipate any rebound in prices.

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