In the last week of January cotton prices ruled at at Rs14,420 a bale (170 kg) – near a five-year low which is some 14 percent below the levels seen at beginning of the cotton season, which began in October. However, cotton prices have now been showing signs of recovery over the last one month.

Decline in prices is attributed mainly to record domestic production and waning exports to China due to change in its reserve policy.

Prices have surged some 7 percent in the domestic derivatives market. Meanwhile, prices on the Inter Continental Exchange (ICE) have also increased over 14 per cent in same period.

Since cotton prices might have bottomed out in January, domestic millers and exporters are expecting an improvement in exports in the coming months due to change in long-term fundamentals and export policy. The Cotton Association of India (CAI) has cut production estimates by about 50 lakh bales to 397 lakh bales.

Domestic consumption is likely to rise by about 4 percent to 311 lakh bales compared with last year.

A combination of slightly lower production and comparatively higher consumption might shrink the carryover stocks the next season.

Earlier in the season, due to subdued export demand, mills were purchasing cotton in line with their requirements.

But now, with the lower than expected output and uncertainty for the crop estimate for next season, mills are actively buying cotton for their long-term consumption demand.

Prospects for exports have improved due to the domestic export policy to exempt both raw cotton and cotton yarn from registration processes, new destinations, weakening rupee and demand for better quality.

Policy changes have encouraged exporters to explore new markets such as Vietnam and other South-East Asian countries.

In December, 10.34 lakh bales were exported, an increase of 41 per cent compared with November.

Moreover, the rupee has been on a decline in last one month, weakening from around 61.43 to 62.18 against the dollar currently, making Indian cotton competitive in the global market.

According to the International Cotton Advisory Committee, in 2015-16 season, consumption of cotton is likely to be higher than production as global production is projected to fall 6 per cent to 24.6 million tonnes (first time in five seasons).

Meanwhile, hedge funds, which had been on net short last month, have rebuilt a net long of 23,222 lots, that too, the biggest in seven months, according to data from the Commodity Futures Trading Commission.

This sharp reversal in hedge fund sentiments were spurred up due to a cut in estimate for US cotton stocks for 2014-15, unexpectedly export demand and concerns of lower planting.

Cotton prices are picking up in the domestic market due to demand for good quality offered by new arrivals. This along with a slightly lower planting projection, early declaration of minimum support price and export prospects to new destinations likely help cotton prices surge ahead in coming months.

On global cotton front, world trade is raised slightly, owing to a 300,000-bale increase in forecast imports by China. Exports are raised for the United States and Pakistan, partially offset by a decrease for India. World ending stocks are now projected to reach nearly 110 million bales.

Consumption is reduced mainly in China and the United States, but is raised for Vietnam and Indonesia.