MCX Cotton Price Performance
  • MCX cotton futures have started the marketing year on weaker note following commencement of harvesting season in October.
  • However, the prices have witnessed one sided rally from November month onwards and the rally remained intact till March, which was driven by supply crunch at the physical market. Domestic supply was reduced drastically due to demonetization of higher value currency note, which led to supply shortage in major mandies across India where larger part of trading is cash based.
  • Prices eased with starting of April as improved arrivals and higher imports amid higher production prospects supported by IMD’s forecast of better monsoon rainfall in year 2017 pulled down the prices. Reports of rising cotton acreages in northern region and favorable weather condition for sowing also kept prices under pressure. 
 
Arrivals and Production :
  • About 97% or 327.63 lakh bales of total cotton produced in year 2016-17 was arrived in the market till end of June.
  • Maharashtra contributed highest in total arrivals during year 2016-17 and witnessed 16% yearly rise in overall production in the current season. Total production in southern region dropped by 16% Y/Y due to lower acreages in Telangana, Andhra Pradesh and Karnataka amid lower yield.
 
Monsoon and Sowing Update :
  • India witnessed early monsoon onset, which progressed rapidly across India. IMD had projected normal rainfall for the country as a whole and rainfall is most likely to be NORMAL (96% to 104% of long period average (LPA)) or 98% of the LPA with a model error of ±4%.
  • Region wise, the season rainfall is likely to be 96% of LPA over North-West India, 100% of LPA over Central India, 99% of LPA over South Peninsula and 96% of LPA over North-East India all with a model error of ± 8 %.
  • India as a whole had witnessed normal rainfall till end of third week of July with cumulative distribution of -1% of LPA. However, Northwest region experienced above normal rainfall so far, which stood at 23% of LPA till 17th July on cumulative basis. Besides, Southern region witnessed 10% deficit rainfall whereas central region saw normal rainfall till mentioned date.
  • Cotton planting started in brisk manner as 74% of normal area for cotton was sown till end of third week of July. Total cotton acreages for year 2017-18 have been higher by 23% Y/Y as on 14th July 2017. About 90.88 lakh hectares was sown under cotton till 14th July whereas 73.93 lakh hectares was planted last year till date.
  • Northern region had witnessed good pre-monsoon showers which facilitated better return on cotton compared to other commercial crops, which spurred farmers to increase the area under cotton. Planting in Northern India, which is irrigated and less dependent on the monsoon, has surpassed the area planted last year. Cotton acreages in Punjab and Haryana has increased by 50% Y/Y to 3.85 lakh hectares and 32% Y/Y to 6.56 lakh hectares respectively in the year 2017-18.
  • About 56.1 lakh hectares was sown in central region compared to 48.56 lakh hectares of last year while cotton acreages in southern region improved by 36% Y/Y and stood at 18.04 lakh hectares till end of third week of July.
 
Export & Import :
 
  • Total cotton export from India has shrunk by 15% in last 6 years till year 2016-17. Lower domestic production and substantial fall in cotton import from China hampered overall export from India. China, which has been the largest importer of Indian cotton, has cut its import by 23% in last 6 years.
  • India exported about 60 lakh bales during the year 2016-17, lower by 13% Y/Y as limited domestic supply and strengthening of Indian currency impacted overall export adversely.
  • Indian rupee strengthened against the U.S. dollar by 5 percent since January 2017 making exports of cotton and cotton products more expensive and less competitive in the international market.
  • Bangladesh, Pakistan and Vietnam are the top three importer of Indian cotton during year2016-17, followed by China and Indonesia.
  • Impact of lower production was seen on import as total cotton import in India has grown with a CAGR of 24% in last year till 2016-17.
  • India imported about 27 lakh bales of cotton in year 2016-17 as supply shortage at physical market and strengthening of Indian currency helped miller to import overseas cotton at cheaper rate.
  • Millers imported Australian and American cotton due to price parity while getting minimal contamination, higher yarn realization, and better quality product compared to the domestic crop also spurred them to increase their import during year 2016-17.
 
Item
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17

                                                         Supply (Lakh Bales)

Opening stock

45

40

50

43

68

46

Crop size

367

380

398

380

338

339

Imports

7.51

14.59

11.51

14

20

27

Total Availability

419.51

434.59

459.51

437

426

412

                                                             Demand (Lakh Bales)

Mill Consumption

223.59

251.74

268.03

278

275

270

Small-Mill consumption

22.12

23.59

25.2

27

25

25

Non-Mill Consumption

5

7.83

6.32

10

10

10

Total Consumption

250.71

283.16

299.55

315

310

305

Exports

129.57

101.43

116.96

54

70

60

Total Demand

380.28

384.59

416.51

369

380

365

Carry Forward

39.23

50

43

68

46

47

  • KCTL research revises its production estimates for the year 2016-17 from 341 lakh    bales to 339 lakh bales, marginally higher by 0.3% against the last year.
  • Similarly, we revise our import estimations for year 2016-17 to 27 lakh bales as rally in domestic cotton prices spurred millers to import cotton from overseas market at competitive prices.
  • Total supply for year 2016-17 is estimated at 412 lakh bales against the domestic consumption of 305 lakh bales.
  • Domestic consumption is estimated at 305 lakh bales lower by 2% Y/Y as rising usage of synthetic yarn amid dwindling export of cotton yarn from India hampered over all cotton usage in India. Cotton export in the year 2016-17 is pegged at 60 lakh bales, lower by 14% compare to previous year.
 
Fundamental Outlook: Bearish :
  • MCX Cotton futures are expected to remain under pressure in next 3 months as most of the interim fundamentals are looking unsupportive for prices.
  • Overall supply looks adequate for next two months due to rise in import during the year whereas millers have adequate inventory level.
  • Northern region reported timely sowing for year 2017-18 and witnessed higher acreages amid better crop progress with minimal pest incidence. Arrival from Northern region is expected from mid Sept which will fill any possible supply deficit.
  • India has seen normal monsoon rainfall so far in July, which has been helpful for planting and crop progress. IMD projected normal rainfall for central region in year 2017 and sowing is expected to speed up in coming days. Higher production outlook for upcoming season may keep prices down in coming months
  • Domestic demand is expected to be affected negatively due to GST as it will take time to millers to adjust with new tax structure. At the same time weaker export demand of cotton yearn from China also likely to hamper overall domestic consumption of cotton fiber.
  • At the same time, limited buying from China is also likely to impact prices negatively as China has been releasing its strategic cotton reserve and have offered about 2.8 million tonnes till 18th July out of which 1.9 million tonnes was sold out.

Technical Analysis Outlook: Bearish :

  • From current level we expect some price recovery in underlying commodity but overall trend is bearish and we recommend sell on rise strategy.
  • On weekly chart MACD made “negative divergence” during March 2017 month and we anticipate price weakness will continues for upcoming weeks after some recovery
  • We expect price will face resistance near to 19700 levels and same time it may fill the gap which is shown in weekly chart.
  • We expect price will take support near to 61.8% Fibonacci retracement of its previous up move from bottom of 14200 till high of 21940 and also that level support by trend line which is represent by pink dotted line.
 
Recommendation

Commodity

/Contract

Strategy

Entry

Target

Stop Loss

Cotton

/Oct

Sell

19500-19700

16600

22000

20400-20600

ICE Cotton and Cotlook A Index Price Performance
  • ICE cotton futures staged one sided rally since Oct, 2016 supported by higher export and limited supply at physical market.
  • ICE cotton futures surged 9% since Oct,2016 till May,2017. However, prices eased on higher planting intention for year 2017-18
  • Lowering of export demand from China during May - June also impacted prices negatively.
  • Improved global supply outlook driven by increased area under cotton in US, India, Pakistan and China kept prices under pressure during June – July.
  • Similarly, Cotlook A index, benchmark of global cotton prices slumped by 5% since May,2017.
 
Area, Production & Yield: Global
  • Global cotton production for year 2017-18 is likely to increase by 8% Y/Y to 1479 lakh bales of 170 kg each owing to remarkable rise in acreage and yield in major cotton growing countries like, India, China and US.
  • India has surpassed China and emerged as largest cotton producer in the year 2016-17 and expected to top the list of major cotton growing countries during year 2017-18 too.
  • Global cotton acreages have shrunk by 3% in last 6 years till year 2016-17.
  • However, world cotton acreages is expected to improve by 10% Y/Y to 324.25 lakh hac in year 2017-18  due to rise in cotton acreages in major cotton growing countries. 
  • Cotton acreages in estimated to increase by 18% y/y in US and likely to improve by 14% and 5% in Pakistan and China respectively.
  • Impact of higher acreages is likely to be seen on world production in year 2017-18 which is expected to increase by 8% Y/Y to 1479.36 lakh bales of 170 kg each .
  • However, world cotton average yield is likely to fall by 2% Y/Y  to 774.64 kg/hectares as per USDA estimates.
 
Global Cotton Import & Export
  • Bangladesh is likely to be remaining as largest cotton importer in year 2017-18 followed by Vietnam and China. Expanding textile industry in Bangladesh and Vietnam is likely to keep cotton import higher in year 2017-18.  
  • Bangladesh cotton import may surge by 14%  Y/Y to 91 lakh bales as per USDA estimates whereas it may increase by 9% Y/Y to 78.2 lakh bales in Vietnam.
  • Import from Pakistan and India is likely to drop by 15% Y/Y to 28.2 lakh bales and 46% Y/Y to 18 lakh bales respectively in year 2017-18. 
  • Global cotton import is likely to increase by marginally by 0.2% and pegged at 471 lakh bales and world consumption is estimated at 1499 lakh bales for year 2017-18 , higher by 3% from the previous year.
  • Cotton export from US is likely to fall by 7% Y/Y to 173.1 lakh bales in year 2017-18. Similarly, cotton export from India is also expected to drop by 2% Y/Y to 53.9 lakh bales as per USDA estimates.
  • However, cotton export may improve in Australia, Brazil and Uzbekistan  by 25% , 11% and 13% respectively.
  • Global cotton export is likely to increase by 1% y/y to 472 lakh bales in year 2017-18 owing to rise in export from Australia and Brazil.
 
World Cotton Balance sheet

Attribute

2013-14

2014-15

2015-16

2016-17

2017-18

Supply ( Lakh Bales) 1 bale = 170kg

Beginning Stocks

1,181.52

1,324.02

1,433.04

1,246.04

1,157.61

Production

1,543.65

1,528.50

1,240.82

1,366.22

1,479.36

Imports

528.71

462.78

451.30

470.76

471.50

Total Supply

3,253.88

3,315.29

3,125.16

3,083.02

3,108.46

Demand ( Lakh Bales)

Exports

527.18

452.41

452.41

468.83

472.02

Domestic Consumption

1,402.69

1,429.84

1,426.71

1,456.59

1,498.67

Total Demand

1,929.86

1,882.25

1,879.12

1,925.41

1,970.69

Ending Stocks

1,324.02

1,433.04

1,246.04

1,157.61

1,137.77

Stocks-to-Use

94.08

100.32

87.36

79.35

75.82

  • Total global cotton supply is likely to be higher by 1% owing to higher production in major cotton growing countries like US, India and China. Global cotton production is expected to rise by 8% Y/Y to 1479.36 lakh bales. 
  • Similarly, world consumption is expected to increase by 3% y/y which is attributed to rise in consumption in India, Pakistan and Bangladesh. 
  • Stock to use ratio is expected to fall in  year 2017-18 to 75.82% showing improvement in demand of cotton fibers  in upcoming season.
 
Price outlook: Bearish
  • ICE cotton futures are expected to trade down in coming months on improved global supply amid rise in production in US which is expected to increase by 11% y/y. Adequate global supply may keep ICE cotton prices under pressure in coming months.
  • Cotton acreages in US for year 2017-18 have increased by 18% y/y whereas crop condition was better owing to favorable weather condition.
  • US cotton export is expected to fall by 7% y/y in year 2017-18 by as export from Australia and Brazil is likely to improve in upcoming season. weaker import outlook  for Pakistan and India in year 2017-18 could impact ICE cotton prices negatively as these countries had increased import from US to fill domestic supply deficit.
  • Forecast of larger cotton inventory in US in upcoming season could weigh on prices as ending stocks in US is likely to grow by 66% y/y in year 2017-18 as per USDA estimates.
 
Recommendation

Commodity/Contract

Strategy

Entry

Target

Stop Loss

ICE Cotton/Dec

Sell

71.00

60.00

74.50

 

......................................................................................................................................................................................................................................

 

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Posted by Content Publisher Saturday, August 19, 2017 1:47:00 AM Categories: Quarterly Report

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