Cotton prices to remain range-bound in CY16
Cotton prices will remain range-bound during cotton year 2016 even if domestic production declines by 10 to 15 per cent, according to ICRA, an independent and professional investment information and credit rating agency.
In a report titled Outlook on Cotton Prices and Consequent Impact on Indian Spinning Industry, ICRA said increased government interventions have driven prices over last few years.
It pointed out that despite increasing supply and negligible demand growth over the past four years (CY 2011-12 to CY 2014-15), the global cotton prices and trade were increasingly driven by the government policies in various producing and consuming countries. The massive cotton procurement undertaken by China during the cotton years from CY 2011-12 to CY 2013-14 at higher support prices than the international prices resulted in increased dependence of the Chinese mills on cheap imported cotton, thereby resulting in increased imports by China and hence rising prices.
This boosted import demand from China supported the international prices at $2/Kg despite the built up in the global cotton stock levels; as 50 per cent of the cotton production in China was annually accumulated by the Chinese government under its support program and hence was not available in market. Subsequently, with change in the China’s cotton policy from CY 2014-15, which was announced in April 2014, the international prices witnessed a sharp decline with Cotlook A index, the most prevalent measure of prices, lower by 24 per cent (at $1.58/Kg) in April 2015 on a YoY basis. The change in the China’s cotton policy to direct subsidy mechanism to farmers from the earlier policy of supporting the prices through reserve purchase program made domestic cotton available to mills in China at market rates and reduced the import dependence.
The ICRA report said the demand-supply dynamics was distorted by Indian Government in CY 2014-15. With reduced import demand from China and consequent decline in international prices, the cotton prices in India (which is largest cotton producer in world) declined below the support prices offered by Indian government leading to massive procurement (25 per cent of CY 2014-15 production) by government owned entities , thereby curtailing the supplies from domestic as well as international markets and hence supporting the international prices (in $ terms) closer to support prices offered by Indian government. Had Indian government not undertaken support operations, the domestic and international prices could have declined further.
According to the report, cotton cultivation remains attractive for the Indian farmers, which will prevent any large shift towards alternate crops and hence mitigate concerns of lower production.
The area under cotton cultivation in CY 2015-16 is not expected to decline significantly as even after a decline in the domestic cotton prices by 21 per cent over the last one year, the high support prices for cotton still continue to keep cotton cultivation attractive for the farmers as the profit per quintal for cotton remains high amongst the competing crops.