MCX Cotton Price Performance
- MCX cotton futures followed seasonal price pattern in the year 2017-18 which started in Oct, 2017 as prices remained under pressure owing to commencement of harvesting activities in major cotton growing region.
- Talking about the last year price performance, prices moved in choppy manner as one sided rally was seen till March which was largely supported by supply crunch at physical market caused by demonetization effect. Withdrawal of higher value currency note not only impacted overall supply in major mandies across India where larger part of trading is cash based, which had forced exporters to buy cotton at higher prices to fulfill their export consignment.
- However, huge sell off was witnessed from April onwards on improved arrivals amid higher production prospects for the year 2017-18 supported by reports of rising cotton acreages in northern region and favorable weather condition for sowing.
- Overall arrivals for the year 2017-18 has been higher by 35% Y/Y till mid of Nov 2017 and reported at 52.73 lakh bales across India.
- Impact of huge crop size is being seen in northern region where arrivals have surged up to more than double in Haryana and about more than 60% Y/Y in Rajasthan.
- Arrivals in Telangana and Maharashtra also rose significantly due to better crop development and favorable weather condition for harvesting.
- However, cotton arrivals in Gujarat has dropped by 29% y/Y due to late harvesting owing to delayed sowing and unseasonal rainfall in Gujarat in the month of September.
- Total arrivals were reported about 330 lakh bales in the year 2016-17 as per data compiled by Cotton Corporation of India.
Sowing Update for year 2017-18
- Despite of delayed monsoon rainfall in Central region, overall acreages has increased by 9% Y/Y and reported at 74.4 lakh hectares, which was marginally lower by normal estimated area. Rapid progress of monsoon rainfall since second week of July facilitated sowing activities in major cotton growing areas in Gujarat and Maharashtra. Cumulative monsoon rainfall for central region was reported normal recorded 94% of LPA.
- Similarly, planting in Northern India, which is irrigated and less dependent on the monsoon, has surpassed the area planted last year due to better price realization. Cotton acreage in Punjab and Haryana has increased by 50% Y/Y to 3.85 lakh hectares and 32% Y/Y to 6.56 lakh hectares, respectively.
- Cotton acreage in southern region also increased by 42% Y/Y due to favorable monsoon progress whereas farmers shifted area from pulses to cotton in southern region in anticipation of better prices. Cotton acreage in Telangana surged by 51% Y/Y and recorded at 18.66 lakh hectares.
Global Supply and Demand Update
- Global cotton production for the year 2017-18 is likely to increase by 14% Y/Y to 1558 lakh bales of 170kg each owing to remarkable rise in acreage and yield in major cotton growing countries like India, China and US.
- India has surpassed China and emerged as largest cotton producer in the year 2016-17 and expected to top the list of major cotton growing countries during year 2017-18.
- USDA has estimated cotton production for US for the year 2017-18 at 274.13 lakh bales, higher by 24% Y/Y while it is pegged at 117.3 lakh bales for Pakistan, higher by 19% Y/Y.
- Global cotton consumption is expected to increase by 5% Y/Y owing to substantial rise in cotton uses in China, Pakistan and India. USDA has forecasted world cotton consumption for the year 2017-18 at 1529 lakh bales of 170 kg each.
- Total cotton export from India has shrunk by 15% in last 6 years till year 2016-17. Lower domestic production and substantial fall in cotton import from China hampered overall export from India. China, which has been the largest importer of India cotton has cut its import by 23% in last 6 years till the year 2016-17.
- India exported about 60 lakh bales during the year 2016-17, lower by 14% Y/Y as limited domestic supply and strengthening of Indian currency impacted overall export adversely.
- Indian cotton export is expected to fall about 5% Y/Y in the year 2017-18 due to quality concern amid un competitiveness of Indian cotton prices. Higher production outlook for US and Australia may impact overall export from India.
- Bangladesh, Pakistan and Vietnam are the top three importers of Indian cotton during year2016-17, followed by China and Indonesia.
Cotton Import in India
- Impact of lower production has been seen on import as total cotton import in India has grown with a CAGR of 24% in last year till 2016-17
- India imported about 27 lakh bales of cotton in the year 2016-17 as supply shortage at physical market and strengthening of Indian currency helped miller to import overseas cotton at cheaper rate.
- Cotton import in India is expected to tumble by 44% Y/Y in year 2017-18 and may stand near about 15 lakh bales.
Balance Sheet : India
- Cotton production in India is estimated to increase by 9% Y/Y in the year 2017-18 owing to higher acreage amid better yield realization across India.
- Impact of surplus production is likely to be seen on import which is likely to drop by 44% Y/Y to 15 lakh bales of 170 kg whereas total supply for the year 2017-18 may surge up to 432 lakh bales, higher by 5% compare to last year as per KCTL research.
- Domestic consumption is expected to improve inline with betterment of economic condition in India. Moreover, meager tax on cotton compared to synthetic yarn is likely to boost up the use of natural fiber.
- At export front, India may witness fall in export demand of Indian cotton due to quality issue. Moreover, Indian cotton may remain uncompetitive compare to cotton prices in US and Australia.
- Considering the balance sheet, supply looks adequate for overall demand in coming months.
Fundamental Outlook : Bearish
- MCX cotton futures are expected to trade in broader range in coming months
- Overall supply looks adequate for next two months due to surging arrival pressure in major cotton growing region. Arrivals in Gujarat have been delayed by one month in Gujarat due to late sowing and expected to pick up in coming months which may weigh on the prices.
- Export demand for Indian cotton expected to fall in the year 2017-18 due to quality concerns as rainfall in Telangana and Gujarat during month of October has impacted overall quality of cotton crop.
- Millers may go hand to mouth buying in coming months due to tumbling export demand of cotton yarn which may further pressurize prices at higher level.
- However, expected intervention by Cotton corporation of India to buoy prices at lower level may restrict major losses. Indian cotton federation has urged government to direct CCI to procure at least 100 lakh bales of cotton in year 2017-18. However, there is no any clear guideline has been released so far related to quantity that is likely to be procured by CCI. In the meanwhile, Gujarat government has declared bonus of Rs.500 per quintal over the MSP of cotton which may also arrest major losses in prices.
- Beside, expected rise in seasonal export demand from China during Dec – Jan could be the major risk factor in coming months.
Technical Outlook : Bearish
- From current level we expect some correction in underlying commodity and we recommend both buy and sell strategy.
- Price trade in a channel line as we can see on chart. On support side of channel line we find fibonacci retracement 61.8% rally from low of 13900 till high of 23990, which is placed around 17800 level.
- On weekly chart momentum oscillator Stochastic trade below 30 level and we anticipate price correction is limited for upcoming weeks.
- We expect price will take support near to 61.8% Fibonacci retracement as mentioned above for near term.
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