Cotton price rise in India and US explained — how textile industry is meeting its needs

Cotton prices in India have been surging on a daily basis and have jumped over 12 percent in August while international prices on Wednesday traded at a seven-week high, not too far from all-time highs hit earlier this year.

MCX cotton August futures traded at Rs 50,550 a bale at 4 pm, up 2 percent from Tuesday’s closing price. This month, the commodity’s price has advanced 12.45 percent.

According to Ravindra Rao, VP- Head Commodity Research at Kotak Securities Ltd, currently, prices have been supportive on the back of reports of crop losses due to pests and heavy rains across cotton-growing areas in the country despite a larger area under cotton this year. “The defaults in imports are supporting prices as it is keeping the stocks lower in the country,” he told CNBCTV18.com.

The president of the Cotton Association of India, Atul Ganatra, explained that MCX cotton prices are going up because the volume is very less due to very low liquidity. “In August contract, you can see 25,000 bales and in October and November, the liquidity is only 10,000-10,000 bales, which is very low against our crop size,” he told CNBCTV18.com.

The cotton area under cultivation as of August 5 was 121.3 lakh hectares, up from the previous year, commodities expert Ajay Kedia said. He said that cotton prices are rising amid lurking fear of pest attacks while last year's October-November rains have also harmed the crop and reduced its quality.

Rao too opined that despite the higher area, weather and pest attacks will play a decisive role in the production prospects in the country.

“Prices will stay higher till the clear picture emerges in India regarding the production,” he told CNBCTV18.com, adding that the new season of cotton in the domestic market will begin in September- October.

The demand from the textile industry is lower at this point due to higher cotton prices. In the meantime, the textile industry will buy cotton on their requirement basis rather than storing it, he said.

Kedia also said consumption demand is slow and steady while the spinner’s pipeline is empty and that they are running on a hand-to-mouth situation.

According to Kedia, initial reports point to damage to crops in Maharashtra and there are concerns about whitefly attacks on the crop in Punjab and Haryana. “If the monsoon gets more active, there could be further damage to the crop,” he told CNBCTV18.com.

He also pointed to defaults in imports that are resulting in domestic price rises. He added that heavy rains have hampered the first round of sowing in Maharashtra.

“The import volumes have been lower despite the removal of import taxes till October. Rupee depreciation and logistics issues are the main cause for lower than expected imports,” Kotak Securities’ Rao said.

In the US, higher sales and exports for new season crops and lower crop production is supporting prices at higher levels.

ICE Cotton (December) jumped to two-month high on reports of deteriorating crop condition due to expectation of lower crop in the US due to hot, dry weather in key growing areas and is currently trade near 118 cents per pound.

United States Department of Agriculture (USDA) in its latest monthly report has cut US cotton production forecast by 3 million bales to 12.6 million bales for 2022/23 —the lowest since 2009/10.

Drought drops US cotton harvest to the lowest level since the 19th century as Texas is projected to abandon 69 percent of its cotton acreage this year. Texas’ planted acreage was 7.1 million while Texas farmers are expected to harvest just 2.2 million, the lowest since 1879.

For 2022/23, US exports are projected at 12 million bales, 2 million below the July projection.

Rao said that US ending stocks are expected to decline to 1.8 million bales, about half the beginning level and the lowest in nearly a century as it witnesses its lowest stock/use ratio since 1924/25. USDA increased their abandonment estimate by 1.42 million acres in a single month.

The Texas production estimate dropped from 7.7 million bales to 2.9 million.

Thus, the supply side worries are now supporting the prices as demand, previously slowed by inflationary and recessionary fears, has stabilized for now, Raid said.

Independent market expert Kush Ghodasara is of the view that textile stocks may witness some pressure in margins due to rising prices.

"Companies are not able to pass on the price rise to consumers due to slack in demand. Therefore, for the time being, textile manufacturers will have to bear the burden of the rising price," he told CNBCTV18.com.