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Cotton positive on export demand, reduce acreage: Angel Commodities Broking

MCX Cotton futures is trading on positive note since the start of April and jumped almost 2.2% or Rs. 440 per bale on reports of lower acreage, increase in export demand from China and increase in mill consumption. Prices have been supportive as Cotton production for the country revised downwards for the fourth consecutive month by Cotton Association of India (CAI) to 360 lakh bales from 375 lakh bales estimated in December last year.
Since the start of the season cotton futures surged more than 11% from Rs. 18,530 per bales to Rs. 20,630 levels. However, cotton futures falls more than 6.2% from its high in January on higher arrivals in the physical market coupled with reports that cotton yarn exports may remained under pressure due to sluggish demand from China. However, in February, cotton futures surged 3.6% on reports that the cotton production in Maharashtra and Telangana may be lower due to pest infestations and exports from the country improved due to weak rupee and good demand from the Asian countries.

Last year, cotton prices were higher during February and March compared to this year on restricted arrivals from the Farmers due to demonetization but this year the arrivals have been good. In the current season 2017-18, the arrivals have been 287 lakh bales, up by 4.5% as on 31st March compared to 275 lakh bales last year. Cotton arrivals in Gujarat recorded highest at 76 lakh bales (Vs 64 lakh bales last year) followed by Maharashtra at 66.75 lakh bales (Vs 74 lakh bales) and Telangana at 46 lakh bales (Vs 43 lakh bales). In North India, cotton arrivals increase to 47.8 lakh bales compared to 43 lakh bales last year.

Due to vulnerability of cotton to pink boll worm and spurious cotton seeds sold in the market, traders are expecting a reduction in acreage under cotton by 10-15% in the coming kharif season. Cotton farmers are likely to shifting towards oilseed and pulses in hope of better returns. Last year, Pink Bollworm infestation damage crops in in Maharashtra and Telangana had dent farmer incomes.
Moreover, CAI in its latest press release has raised its estimate for India’s export for cotton to 65 lakh tonnes in 2017-18 (Oct-Sep) from 55 lakh tonnes projected in start of the season. Last year, country exported about 58.2 lakh bales of cotton. For CY2017/18 (Oct-Sep) consumption is forecast at 324 lakh bales, up by 5.5% from last year’s consumption of 307 lakh bales. Cotton consumption is expected to improve over last year due to various government schemes and incentives to boost garment and apparel exports will renew mill activity.

Outlook: We expect cotton to trade on positive note towards Rs. 21,500 per bale (CMP: 20,620) in next one month on expectation of improved exports demand and reports of reduction in cotton acreage in coming kharif season. However, if India’s exports during the recent month surge due trade war between the US and China, cotton acreage may increase, supported by near normal monsoon forecast by private weather forecasting company – Skymet. During current season, China is the fourth largest market for Indian cotton after Bangladesh, Vietnam and Pakistan. However, India is hoping to export three times more cotton ie. About 27-30 lakh bales to China next year as it looks to restock cotton and also going to impose a 25% import tax on US cotton. Moreover, cotton prices may also increase if government declare Minimum Support price (MSP) 1.5 times the cost of cultivation.”