Indian cotton can fetch good price if export limits are removed

Indian growers can get good prices for their cotton as the global supply is tight provided the export limits are removed. Moreover the increasing demand cotton from domestic mills has strengthened the cotton prices in the last ten days. There is a 22.5 percent increase in prices to Rs.21,977 per candy. Indian cotton prices are on the rising trend but not if compared to this time with last year, the current prices are still down by 2 per cent. As long as the Government continues to maintain controls on export of the valuable raw materials for clothes, the prospects of long-term gains in cotton remain unclear. Cotton futures, though on an uptrend on the MCX now, trail spot prices.

Cotton production in the 2013-14 crop years (which commenced on August 1) received a boost from the strong monsoon in 2013. According to the latest US Department of Agriculture estimates, the country is expected to produce 36.1 million bales of cotton in 2013-14. In India, a bale of cotton amounts to 175 kg, but globally, a bale is calculated as approximately 218 kg. Consumption, on the other hand, is tipped to rise to only 28.7 million bales. This would leave a surplus of around eight million bales available for exports, acting as a potential driver of prices.
With the rupee trending weak against the US dollar, there is a growing rationale for exports to capitalize on the depreciation.
But the Agriculture Ministry’s refusal to issue Open General Licence for cotton exports effectively closed this route for domestic producers, with the additional availability depressing prices.

The states of Gujarat, Maharashtra and Andhra Pradesh are the major producers of cotton in India, accounting for 75 per cent of the country’s total output. India is currently the world’s second-largest exporter of cotton.

Global prices of cotton have been on the rise as well. Prices of cotton see-sawed violently in 2013; they rose sharply in the first half of the year only to witness a setback in the latter part.

In 2014, it recovered and was up 0.7 per cent on the US-based Intercontinental Exchange during the year to February 14. This is because global production of cotton is expected to have declined in 2013-14 amid unfavorable weather in key producing countries, such as China. The US Department of Agriculture has pegged global production of the crop at 116.83 million bales in 2013-14, down 3.9 per cent in comparison to the previous year.

On the other hand, global demand for cotton has risen. The USDA has projected a 2.2 per cent increase in consumption of cotton worldwide in the 2013-14 seasons to 109.8 million bales.

This is likely to result in tightness in the international supply situation, presenting a huge opportunity for Indian cotton growers to pick a good price for their produce, if the Government permits it. Prices of the commodity are down significantly from the high of $2.15 per pound (Rs.1,06,678 per candy) seen in April 2011.

The slowdown in China, however, could have a bearing on the commodity’s fortunes.

MCX Cotton (Rs.20,710) futures contracts have been in a strong uptrend ever since they touched a low of Rs.18,210 in November 2013. Immediate support is seen at Rs.20,641, the 21-day moving average. Subsequently, the 200-day moving average, currently at Rs.20,251, is a key short-term support for the contract that can limit any downside.

While above these support levels, the contract can rise to the short-term target of Rs.21,620.

For the medium-term, Rs.21,620 — the 61.8 per cent Fibonacci retracement level — will be the crucial resistance to be watched for the contract.
Whether this resistance gets breached or not will decide the medium-term trend. A breach of Rs.21,620 could take the contract to Rs.23,000. On the other hand, a reversal from Rs.21,620 might drag it lower to Rs.20,500 or Rs.20,300 over this time period.