Cotton prices to remain subdued due to supply surplus

Domestic cotton prices are likely to remain subdued over the third quarter of the current fiscal due to fresh arrival of cotton in the markets in cotton growing states. Compared to the previous season’s nearly 30.7 million bales (170 kg per bale), Cotton Association of India (CAI) has estimated an increase in cotton production by almost 12% to 34 to 35 million bales in the current 2022-23 domestic season (October to September).

As per a recent report of India Ratings and Research (Ind-Ra) estimated higher production of cotton is supported by a 7% higher area under cultivation in the current domestic cotton season. The report claims that with the domestic as well as global consumption likely to be lower than the previous season, a supply surplus expected which is likely to weigh down upon the prices.

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According to CAI president Atul Ganatra cotton prices in the domestic market are hovering around Rs 65,000 per candy (356 kg) as against Rs 51,000 per candy or 78.5 cent in International Cotton Exchange (ICE). “In fact, some of the multinational firms are engaged in forward selling January month contracts at Rs 59,000-60,000 per candy in the domestic market. They are hedging their risk by taking the ICE January contract at Rs 50,000 or 78 cent. This activity is alarming for the entire textile value chain, especially for spinners and yarn buyers,” says Ganatra.

Spinning mills across India are expecting and waiting for further downfall in domestic cotton prices, says Gautam Dhamsania, secretary Spinners Association of Gujarat (SAG), adding that in order to compete in international cotton yarn market, local mills need to source raw-material at prevailing international prices as out of India’s total production of cotton yarn, 40% is being exported.

“The spread between international and domestic prices of cotton determines the competitiveness of Indian yarn spinners. While global cotton prices fell 17% between April and August this year in anticipation of higher production, domestic prices rose 2% because of limited supply during the period. Pricier domestic cotton thus eroded India’s competitiveness, leading to a loss of export market share to China and Bangladesh,” says a recent report of CRISIL Ratings.Mohit Makhija, senior director, CRISIL Ratings says that higher cotton production should cool domestic prices and allow spinners to regain some export competitiveness but international cotton prices could fall on slowing yarn demand from Pakistan and Vietnam amid stable global production.

Avdhesh Sejpal, president of All India Cotton, Cotton Seeds and Cotton Cake Brokers Association, says that fresh arrival of cotton has started in Gujarat and other cotton growing states but farmers are still reluctant to sell their harvest at current rate as they have seen peak cotton price of as high as Rs 1,10,000 per candy.

As a result, on an average, nearly 3 million bales of cotton have been hitting the Gujarat mandis on a daily basis since last week of October. “We are expecting arrival of cotton in a huge quantity during the December-January period. Prices of cotton would be determined upon holding capacity of farmers and export as well as domestic textile industry demands in coming days,” adds Sejpal.