Near Term Fundamentals Still Appear Positive for India’s Cotton Cake

Cotton cake ended the week on a positive note. The market was supported from limiting inventory in domestic markets and perceptions in context to stable export demand and lower ending stock estimates.

Strength in the commodity was also due to reduction in the exchange warehouse stocks in the last few weeks. But the upside was capped because of weakening prices of cotton towards the end of the week. Week on week September cotton cake at NCDEX was marginally down by Rs.21 and the September contract of Cotton cake was seen trading between 3040 and 3200 for the week ending August 22. In Akola market, cotton cake was traded between Rs.3130-3175/qtl and in Kadi the traded offers stood between Rs.3075-3175/qtl.

The broader view remains bullish considering the limited inventory of cotton seed in the country, in addition to brighter prospects for cotton exports, once the new season supply sets in. In physical markets traders and stockists are ready to buy at current offers since they are expecting another gain of Rs 200-250 per quintal in the physical markets by next month. As understood from the near term charts we expect September cotton cake to trade with an upward bias unless it closes below 3050 for at least two consecutive sessions. In case the contract gives comfortable closing above 3050, then chances for 3300-3350 shall increase in near future.

The Indian Finance Ministry has recently rejected the appeal from a segment of the industry to remove the 10 percent import duty on cotton. Imports of cotton have significantly gone up in the last few years, even though India is the largest producer of cotton in the world. This factor shall continue supporting the cotton market in coming weeks. As a result cotton cake prices shall tend to maintain the upward trend. The rainfall distribution shall govern the sowing area outlook in coming weeks. As of now the rains are favorable for the sowing in Maharashtra but there are concerns in Gujarat where the rains need to improve now. The states of Maharashtra, Gujarat, Karnataka and Madhya Pradesh contribute nearly about 80 per cent of the area under cotton.

CAI reduces cotton crop estimate: The Cotton Association of India (CAI) in its latest estimate has reduced its cotton crop forecast to 354.50 lakh bales, lower by 1.50 lakh bales in its July estimate for 2020-21, compared to last month, after lower production in Gujarat and Telangana. The total cotton production in 2019-2020 was around 360 lakh bales.  Domestic consumption for 2020 – 21 i.e. October 2020 to September 30, 2021 is estimated to be higher by 5 lakh bales considering the high demand for cotton yarn. 

The CAI has also increased the exports estimates for the season to 77 lakh bales from its previous estimate of 72 lakh. This export estimate is higher by 27 lakh bales from 50 lakh bales in the previous year. The carryover stock at the end of the season i.e on September 30, 2021 is now estimated at 82.50 lakh. For India the USDA expects cotton production for this season at 29.0 million bales, 700,000 bales (2.5 percent) above 2020/21 as an improvement in yield more than offsets a slight decrease in area. For 2021/22, India’s area is forecast at 12.9 million hectares, and the projected yield at 489 kg per hectare, which is above the 3-year average.