March 29, 2024

Diabetestracker

Passion For Business

Covid-19 to push cotton into bearish zone

Cotton has been consistently performing well in India’s domestic market for the past couple of years. The year 2019 has not been an exception.

However, 2020 seems to be bucking the trend as the demand and supply factors have suddenly turned unfavourable.

Cotton’s near-term prospects are likely to remain bearish in 2020.

Global factors

A latest USDA report estimates a 2.6 per cent increase in global output to 121.7 million bales (1 bale = 170 kg), but an 8.1 per cent decrease in global consumption in 2019-20 to 110.6 million bales.

A combination of better crop and reduced off-take, along with an increase in opening stock, elevates ending stock by 10.98 million bales in 2019-20 compared with a year ago.

The expectation of larger output in Brazil, Chad and Tajikistan offsets the lower output from the US and other major producing countries. On the other hand, coronavirus outbreak has led to a reduced consumption forecast from every major country with total global consumption facing one of the largest annual declines on record.

For the 2020-21 season, planting has just begun in a few regions and uncertainty hangs over the exact impact of Covid-19 outbreak. Thus, it would be too early to speculate about the next season cotton output. Moreover, the pandemic scare presents a major risk factor for global demand for the commodity.

To sum up, Covid-19-led macroeconomic challenges, including lockdowns in major producing and consuming countries, is likely to alter the demand-supply equation going forward.

Fears of global economic slowdown driven by coronavirus and its impact on supply chains already resulted in the ICE (Intercontinental Exchange) cotton futures sinking to their lowest (55.65 cents a lb) in more than 10 years on March 19.

Domestic factors

The Cotton Association of India (CAI) in its March estimate says India’s total production in the current season (October 2019-September 2020) will be 354.50 lakh bales. With the opening stock of 32 lakh bales and import of 25 lakh bales, total availability will be 411.50 lakh bales.

Against this, domestic consumption is estimated at 331 lakh bales, while export is at 42 lakh bales.

That leaves an estimated closing stock of 38.50 lakhs bales at the end of the current season, which is 20 per cent higher than the opening stock.

With the Covid-19 pandemic intensifying and, as of now, with no clarity on when economic normalcy will return, the projections for both domestic consumption and exports appear a bit too optimistic.

Till March 2020, 283.03 lakh cotton bales have arrived in Indian markets, while the Cotton Corporation of India (CCI), the central agency for procurement, has purchased 80 lakh bales in the current season under the government’s minimum support price operations.

The CCI has halted its procurement operations as of now due to the ongoing lockdown.

With sluggish demand for cotton yarn, the domestic demand for cotton fibre from yarn manufacturers will be adversely affected. The lockdown and the shortage of workers will add to the problem.

India’s cotton yarn exports to China, the biggest buyer, has been declining due to loss of price competitiveness caused by excessive hikes in domestic support prices. Of late, India has been facing increasing competition from countries such as Vietnam that possesses clear logistical advantage as it is nearer to China, while India’s major yarn production base is Coimbatore in Tamil Nadu.

Shipping cotton yarn from Coimbatore to China takes 21 days vis-a-vis less than seven days from Vietnam. Vietnam also enjoys a 3.5 per cent import duty advantage vis-a-vis India due to the China-ASEAN Free Trade Agreement. The demand from America and Europe for apparels made in China, Bangladesh and India is likely to go down due to depressing effect of Covid-19 that is proving to be more troubling for developed countries. As demand for cotton fibre and yarn is derived, lower demand for apparels will result in lower demand for fibre and yarn.

That’s bad news for cotton farmers and for traders who are long on the commodity. Over the past one month, cotton future prices on the MCX have fallen by 15 per cent, from ₹19,004/bale to ₹16,169/bale.

Outlook

In the short run, none of the demand factors are supportive.

The domestic demand and export demand are likely to be sluggish due to disruptions caused by Covid-19. That will put pressure on cotton prices.

Things can get worse if the lockdown prompted by the pandemic prolongs (and it’s too early to conclude how long it will persists as of now) and major consuming markets head into deeper economic recession, dampening consumer demand.

The writer is co-founder, director and head of agriculture, food and retail at Indonomics Consulting.