Cotton Crop Survey & Market Outlook

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1 Cotton Crop Survey &

2 Kunal Shah Head - Commodity Research Nikhil Murali Research Analyst Cotton Sugar Pulses Outlook: - Long-term Bullish Market Recap Cotton market witnessed new highs in the past season as we predicted in our last Crop survey report. At MCX, the prices gradually picked up from the levels of Rs 15,000-16,000 per bale at the start of the season to Rs 23,000-24,000 levels in mid-july of MCX Cotton Rupees per Bale Source: MCX, (MCX Cotton 29mm contract) As we forecasted, the cotton production took a hit and was restricted to only 323 lakh bales in the previous season because of the rampant pest attacks and crop diseases. This led to a tight supply scenario in the market which made the prices to peak. Domestic Scenario Sowing Estimates (Cotton Acreage In Lakh Hectares) State * Punjab Haryana Rajasthan Northern Zone Gujarat Maharashtra Madhya Pradesh Central Zone Telangana/AP Karnataka Tamil Nadu Southern Zone Others Total Source: Ministry of Agriculture, NB Research, *Estimate 2

3 According to our analysis, the overall area under cotton cultivation in the country is about lakh hectares, which is around 8% down from last year figure of lakh hectares. Production North Zone The memories of last year s whitefly pest attack still haunting many a farmers in the states of Punjab and Haryana, the acreage dedicated for sowing cotton reduced significantly this season. Many farmers have shifted towards cultivation of pulses like Arhar (Pigeonpea) and vegetables. Moreover, the general resentment against Bt Cotton has resulted in shift towards Desi Cotton in a major way. According to our survey, around 4.4 lakh hectares were under cotton cultivation in Punjab and 5.27 lakh hectares in Haryana last year. We expect this year s acreage to reduce by around 40% in Punjab to 2.5 lakh hectares and around 15% reduction in Haryana. But as the crop is in good condition devoid of any major pest attacks or diseases, in both these states, we expect the yield to be more this year compared to last year. So we expect the production in Punjab to rise 50% from last year to 9 lakh bales and around 63% increase in Haryana which will make it to 22 lakh bales approximately. In Rajasthan, the acreage under cotton cultivation went up by 7.5% from last year making it 4.5 lakh hectares. The crop is in good condition in both Upper and Lower Rajasthan which will definitely result in higher production. We expect it to be in the range of lakh bales, cent percent up from last year. Central Zone Gujarat Gujarat, the largest cotton producing state, received only nominal amount of rainfall during the monsoon making it the worst affected state with water stress. Due to this, the sowing got delayed by a month at least, in many cotton growing regions of the state. Besides that, many farmers shifted from Cotton to Groundnut cultivation in the meanwhile. We estimate the area under cotton cultivation to be around 24 lakh hectares which is 13% lower than last year. Districts of Rajkot, Amreli, Junagadh, Surendranagar and Bhavnagar in the Saurashtra region are the major cotton growing belt of Gujarat. When we visited the cotton fields on October 1st week, the crop was in pretty good condition in Rajkot Morbi belt. Boll formation was almost complete and the crop was ready to be harvested within days. The plants were devoid of any pest attacks and disease. Considering the favorable climatic conditions existing in this region, we expect the yield from this region to be around 30 Maund/Bigha compared to last years figure of Maund/Bigha Cotton Fields In Rajkot-morbi Belt 3

4 In Gondal region, a major share of the crop was late sown; so it was in flowering and boll formation stage. But we found isolated whitefly pest attacks in this region. The plants which have been infested has been uprooted and burnt. Pesticide spraying has been done and currently situation is under control. At present, it is difficult to assess the yield in this region as much will depend on the climate in the coming weeks. Cotton Field-Gondal Whitefly Infested Crop In Gondal Region Pesticide Spraying In Progress- Gondal Region In Somnath - Una belt, this year, around 15% of the normal cotton area got shifted towards groundnut cultivation. Less yields from cotton crop for past 2 years due to wide spread pest attacks made the farmers to take this decision. Unfortunately this year also some fields were affected by Pink Bollworm insect. Though the attacks were not severe like last year, we suspect it may be reflected in the productivity in a negative way. Cotton Field-Una Pink Bollworm Infested Crop - Una Pink Bollworm Infested Crop - Una 4

5 Crop At Boll Maturation Stage - Amreli In Amreli Savar Kundla region one of the main cotton growing areas of Gujarat, this year, around 10-15% of the normal cotton area got shifted towards Groundnut cultivation. When we visited the fields, the crop was in good condition. Most of the fields were rainfed, so the crops were in boll formation stage as it was sown late due to delayed monsoon. The region received a good amount of rainfall (light to heavy showers) in early days of October month which will be beneficial for these late sown crops. The crops were devoid of any pest attacks or diseases. The largest area under cotton cultivation in Gujarat falls under the district of Surendranagar. Though some of the fields were under moisture stress during the initial growth phase, the showers in early October were beneficial for the late sown crop which was in flowering and boll formation stage. But on the other hand, for early sown crop, heavy showers during this time will affect the quality of the cotton. The crops were devoid of any pest attacks or diseases. Cotton Field-Surendranagar Early Sown Crop - Surendranagar In Kadi and neighbouring areas, the crop was in good condition in irrigated fields. No incidence of pest attacks or diseases were reported till now. Irrigated Field- Kadi Region Crop Ready To Harvest-Kadi Region 5

6 In Kutch region, the growth of the crop has been affected by deficient monsoon rains. We expect the yield to drop considerably because of this same reason. Moreover, many farmers have shifted from cotton to groundnut cultivation also. Cotton Fields- Kutch District Irrigated Field- Palanpur Crop Ready To Harvest- Kutch Region Though the overall acreage in Gujarat is 24 lakh hectares this year, which is around 13% less than last years figure, we expect the higher yield in some major cotton growing belt to compensate it. Arrivals At Rajkot Mandi 6

7 Fresh Kapas arrivals have started in major markets like Rajkot. The quality of the new crop is commendable, though the moisture is little bit on the higher side After analyzing all the above said factors, we expect the cotton production in Gujarat to be around 90 lakh bales which is 5% less than last year figures. Unlike past couple of years, Maharashtra, one of the largest cotton growing states was blessed with sufficient monsoon rains this year. The crop is in good condition devoid of any pest attacks or diseases. Considering all these favorable factors, we expect the yield to increase by at least 20% to kg/ha from kg/ha in last year. So we estimate the production to be in the range of lakh bales, an increase of 17% from last year s figure. The scenario is not so different in Madhya Pradesh also. We expect the production to be around 19 lakh bales, up by 11% from last year figure of 17 lakh bales. South Zone The states of Telangana and Andhra Pradesh constitute the main cotton growing belt of South India. As expected, the total area under cotton cultivation came down by at least 19% i.e. from 23.6 lakh hectares to 19 lakh hectares. But considering the favorable climate and no major incidence of pest attacks or diseases from any regions, we estimate the production to be around 73 lakh bales, 8% down from the previous year. In Karnataka, the crop is in good condition overall, though incidents of Pink Bollworm attack have been reported from Haveri district and some other regions. We expect the production to be around 21 lakh bales compared to last year s figure of 19.5 lakh bales. We expect the production in Tamil Nadu to be around 5 lakh bales this year compared to last year s figure of 4 lakh bales. Overall Outlook By analyzing the crop conditions in all the major cotton growing belts, we estimate the cotton production to be in the range of lakh bales, 7% up from last year. 7

8 Cotton Production - India (In Lakh Bales) State Punjab Haryana Rajasthan North Zone Gujarat Maharashtra Madhya Pradesh Central Zone Telangana & AP Karnataka Tamil Nadu South Zone Others Total * Source: NB Research; *Forecast Domestic Cotton Balance Sheet Domestic Cotton Balance Sheet (In Lakh Bales) Particulars Supply * Opening Stock Production Imports Total Supply Demand Mill Consumption Small Mill Consumption Non-Mill Consumption Total Consumption Exports Total Demand Ending Stock Stock to Use Ratio Source: NB Research, CAB, *Forecast; Crop Year: - Oct-Sep 8

9 We expect that India will import around 17 lakh bales of cotton this year, mainly from Australia and West Africa. But much depends up on the parity existing between the domestic and foreign cotton. And we expect the consumption to be in around 315 lakh bales, in tandem with last year. But a major factor to watch out is the Exports scenario. Last year, according to our survey, India exported around 70 lakh bales and Pakistan and Bangladesh were our major importers. But considering that Pakistan is having a better crop than last year and the increasing tensions between the two counties in the backdrop, we are not optimistic about Pakistan importing cotton from our country. Moreover, if at all Pakistan need to import Cotton, they may import from USA or Brazil hoping for a more competitive rate. We must not forget that this year, USA will be having a good crop of about 16 million bales (480 lb bales) which will leave them with a good amount of surplus for exports. So according to our analysis, this year, we may be able to export around 55 lakh bales at most. This brings the stock at end of the year to mere 29 lakh bales which definitely warn us of the impending supply tightness in the market. Global Cotton Balance Sheet (In million 480-lb bales) Global Cotton Balance Sheet Particulars Supply * ** Opening Stock Production Imports Total Supply Demand Domestic Use Exports Total Demand Loss Ending Stock Source: USDA, *Estimate **Projection; Marketing year beginning August 1 According to USDA, the global cotton production will be up by at least 6% from last year, thanks to expectations of good crop in USA and other major cotton growing countries. Interestingly, they have raised the forecast for consumption to million bales. So the ending stock in is expected to be million bales, which is 9.5% less than last year s figure of 96.6 million bales. This definitely reflects the impending supply tightness to be felt in the market. Cotton Yarn Scenario In recent times, Indian cotton yarn has become competitive with Vietnam cotton yarn, which is a favorable trend indeed. But the blended yarn, especially the viscose blended yarn prices in China have come down due to the fall in VSF prices. Much will depend on the crude oil price which will determine the competitiveness of 9

10 the synthetic fiber industry. Another concern is the fall in India s spun-yarn exports in the past month. In September, it declined 30.2 % in volume as China favored Vietnam over India for spun yarn imports. China s yarn imports from Vietnam surged 34% in September from a year earlier whereas Indian shipments to China were down 56%, and imports from Pakistan trimmed by 30%. It is a well-known fact that many Chinese textile companies are establishing spinning mills in Vietnam and the yarns which are being produced flows back to China. The cotton textile spinning capacity of Vietnam is increasing year-on-year which stands at million spindles as of now, poses a major threat to India. Cotton Price Outlook International Market A multitude of factors play a significant role in determining the price of cotton in international market. ICE Cotton futures witnessed a spectacular rally last year factoring the supply crunch felt in the markets of India and Pakistan. ICE Futures US cents/lb Source: ICE (Cotton No.2 Futures), Reuters As visible from the graph, ICE Cotton rallied from cents/lb in 8th of July 2016 to cents/lb in 5th of August 2016, i.e. around 16% increase within 1 month! But it didn t sustain at that levels and retraced back to stay range bound between cents/lb. As the arrival pressure is mounting in the US market, we expect it to correct to cents/lb in the near-term where it is expected to get good support. Though USA is expected to have a good crop this year, the overall supply tightness in the global market will support the prices from a major downfall. So we foresee the prices to trace back to the levels of cents/lb in the long-term. If you look at the CFTC Managed Net Fund position in the Exchange, it s clearly visible that it has increased tremendously in the months of July and August and still holds strong which surely reflects the speculative sentiment in the cotton futures market. 10

11 Managed Net ICE Source: Reuters, ICE Another factor to watch out is China s cotton reserve sale in the future. As they haven t offloaded the entire stockpile, they may gradually try to dispose it off only. But as the cotton production in China is expected to be less this year, they may have to resort to imports also. All these factors will definitely weigh on the global cotton market. From the macro-economic point of view, a stronger dollar will pressurize the prices. So a potential Fed rate hike may strengthen the DXY (Dollar index), which may have a negative impact on the international cotton price at least for a short period of time. Price Forecast Cotton Complex Cotton 29 mm Considering the impending supply tightness to be felt in the market, we forecast cotton prices to be Long-Term Bullish. But in the short-term, we expect the prices to be bearish as the market will be witnessing heavy arrival pressure in the month of November. The spot price (S-29mm, Rajkot) is expected to correct from the present levels of Rs 39,000-38,500/candy to Rs 37,000-37,500/candy within the month of December. But we feel that much downside will be capped considering the less carry forward stock and the impending supply tightness. So, we foresee the prices to gradually pick up from the month of January and within the month of May, we expect it to test Rs 41,000-42,000/candy. Further upside may happen depending upon our exports scenario. Basis, which determines the competitiveness of Indian cotton at the global front, is right now around 6 cents/lb which is favorable for exports. So the cotton prices are expected to gradually pick up momentum owing to this. In the futures front (MCX Cotton 29mm), we expect the prices to correct from the current levels of Rs 18, /bale to Rs 17,800-18,000/bale in the near-term as the prices will be under pressure from the fresh arrivals in the market. But we feel that Rs 18,000-18,300/bale is a good 11

12 range to initiate longs expecting an upside till Rs 21,000-22,000/bale within the month of May. Kapas In NCDEX, Kapas price is expected to correct from the current levels of Rs per 20 kg to Rs per 20 kg in the near-term. But we foresee the prices to gradually rise from these levels and touch Rs per 20 kg within the month of May. Cotton Seed Oil Cake We expect the Cotton seed oil cake price (In NCDEX) to ease from the current levels of Rs /Quintal to Rs /Quintal in the near-term. We expect the price to pick up momentum from those levels and test Rs /Quintal within the month of May. 12

13 COMMODITY & CURRENCY RESEARCH TEAM Name Designation Kunal Shah Research Head Devidas Rajadhikary Sr. Research Analyst Harshal Mehta Sr. Research Analyst Mohammed Azeem Research Analyst Ravi D'souza Research Analyst Nikhil Murali Research Associate Anish G Research Associate Smit Bhayani Research Associate Shrishty Agrawal Research Associate Disclaimer This Document has been prepared by N.B. Commodity Research (A Division of Nirmal Bang Commodities Pvt. Ltd). The information, analysis and estimates contained herein are based on N.B. Commodities Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents N.B. Commodities Research responsible for the contents stated herein. N.B. Commodities Research expressly disclaims any and all liabilities that may arise from company mentioned in this document. Address: Nirmal Bang Commodities Pvt. Ltd., B2, 301 / 302, 3rd Floor, Marathon Innova, Opp. Peninsula Corporate Park, Ganpatrao Kadam Marg, Lower Parel (W), Mumbai , India 13