India’s cotton output set to rise
During CS 2019-20, cotton production is estimated to have increased by 13.6 per cent to 6 million tonnes during CS 2019-20 on account of higher yields backed by favourable monsoon conditions.
Cotton output in India is estimated to grow by a positive rate for the second year in a row during the cotton season (CS) October 2020-September 2021 and is expected to increase by 4.7 per cent y-o-y to 6.3 million tonnes. Likely higher acreage and better yields on account of adequate rains are estimated to support cotton output during the year. In addition to this, higher cotton minimum support price (MSP) by 4.9 per cent to Rs 5,515 per quintal and 5 per cent to Rs 5,825 per quintal for medium staple cotton and long staple cotton, respectively, for CS 2020-21 (See Table 2) is also expected to aid cotton production.
During CS 2019-20, cotton production is estimated to have increased by 13.6 per cent to 6 million tonnes during CS 2019-20 on account of higher yields backed by favourable monsoon conditions. Also, higher MSP by 1.8 per cent-2 per cent increased cotton output. In CS 2018-19, the MSP was hiked in the range of 26 per cent-28 per cent to support farmer’s income.
Apart from this, aggressive procurement by the Cotton Corporation of India (CCI) under MSP post lockdown caused the farmers to get their cotton to the market rather than carrying forward cotton to the following year which also increased production estimate for CS 2019-20.
Cotton stocks
Higher production amid weak cotton consumption during CS 2019-20 due to disturbances caused by Covid-19 induced lockdown is estimated to have doubled the availability of surplus cotton to 2.6 million tonnes or 152.5 lakh bales during CS 2019-20 from 1.1 million tonnes or 65.5 lakh bales of cotton in CS 2018-19. Resultantly, closing stock of cotton in CS 2019-20 is estimated to touch high levels of 1.7 million tonnes or 102.5 lakh bales from 0.4 million tonnes or 23.5 lakh bales in the last season.
Total domestic demand for cotton is estimated to decline by 19.7 per cent on a y-o-y basis to 4.3 million tonnes or 250 lakh bales during CS 2019-20. The impact of subdued demand for cotton was also witnessed in lower cotton yarn production primarily in the first quarter of FY21 when the output fell sharply in the range of 74 per cent-94 per cent y-o-y in each of the months during the quarter due to lockdown restrictions which started in the last week of March 2020. Also cotton yarn production had declined by 16 per cent in March 2020.
On a cumulative basis, cotton yarn production declined by 28.8 per cent to 2,478 thousand tonnes during October 2019-July 2020 and it fell by a higher 64.4 per cent to 491.4 thousand tonnes during April-July 2020. It is to be noted that improvement in cotton yarn production was seen in the month of July 2020 as the pace of fall in its output reduced to 3.1 per cent during the month from 73.7 per cent in the immediate earlier month June 2020 backed by easing restrictions and announcement of unlock guidelines.
In the following months, improvement in cotton yarn production can be expected on sequential basis supported by various guidelines that increases economic activities in the domestic market. Cotton yarn output however is expected to decline by around 18 per cent-20 per cent on a yearly basis as demand will take time to reach pre Covid-19 level.
Weak international demand for cotton yarn due to COVID-19 disruptions also had an impact on its exports during the period March-May 2020 where the outbound shipments declined in double-digits in the range of 24 per cent-80 per cent. Post this, exports of cotton yarn witnessed sharp improvement in June 2020 and July 2020 as the shipments surged by 66.5 per cent and 71.5 per cent, respectively, backed by healthy exports to China (India’s largest cotton yarn export destination), Bangladesh and Vietnam during these two months. This restricted the fall in outbound shipments on a cumulative basis.
Resultantly, exports fell by 8.7 per cent to 816 thousand tonnes during October 2019-July 2020 and declined by a slower 2.5 per cent to 280 thousand tonnes in April-July2020. It is important to note that cotton yarn exports to Bangladesh and Vietnam spiked by 68.3 per cent y-o-y to 70.2 thousand tonnes and by 62.3 per cent to 16.3 thousand tonnes in April-July 2020. Exports to China on the other hand increased by a slower 7.2 per cent to 85.8 thousand tonnes during the period. In case higher cotton yarn exports from India continue to Bangladesh and Vietnam, it will augur well for India’s cotton yarn exports during FY21 given the Covid-19 situation.
Subdued global demand impacted the export unit realisation of cotton yarn as it fell by 10.5 per cent (in rupee terms) and 19.4 per cent (in USD terms) to average at Rs 191 per kg and $2.5 per kg in the first four months of FY21 on y-o-y basis.
Cotton prices
Lower domestic demand due to Covid-19 induced lockdown (as discussed above) amid high stocks had an impact on cotton prices in India. It can be seen from chart 2 below that the prices of S-6 cotton variety declined on m-o-m basis for 5 months in a row from March 2020 to July 2020 and that of J-34 cotton variety also fell on a sequential basis from February 2020 to July 2020 except for June 2020 where it increased by a marginal 2.4 per cent.
In addition to this, price cuts by CCI to reduce cotton stocks ahead of the new season’s production also caused the prices to fall. Also, discounts were offered by CCI for bulk purchases of cotton. Nevertheless, the prices of S-6 cotton variety and that of J-34 variety improved on m-o-m basis by 1.5 per cent to Rs.104 per kg and by 4.5 per cent to Rs.98 per kg, respectively, in August 2020 on account of relaxations in restrictions that is believed to have supported economic activities in cotton market.
The international cotton prices however saw improvement on sequential basis from May 2020 onwards; the prices grew from $1.4 per kg in April 2020 to $1.54 per kg in August 2020 after it fell sharply from $1.74 per kg in January 2020 to $1.4 per kg in April 2020. The decline in price was mainly on account of Covid-19 outbreak, which impacted cotton consumption in China (the world’s largest cotton consumer) and the international markets. It is important to note that the cotton prices of S-6 variety in India averaged at Rs.110 per kg during October 2019-August 2020, 4.3 per cent lower compared to the average international prices of Cotlook A index at Rs.115 during the period. The lower domestic cotton prices in CS 2019-20 compared to the international prices nevertheless supported higher cotton exports from India during the year.
Resultantly, exports are estimated to increase by 19 per cent y-o-y to 0.9 million tonnes or 50 lakh bales during CS 2019-20. The growth in exports may provide some respite to cotton industry with high stocks. It is to be noted that while the international prices had started improving on sequential basis from May 2020 onwards, the rise in domestic cotton price of S-6 variety on m-o-m basis was seen only in August 2020 after imposition of Covid-19 induced lockdown in last week of March 2020.
Easing of restrictions is expected to provide some support to the domestic cotton prices in coming months. However, the new crop arrival of CS 2020-21 will restrict any major improvement in prices. Even when cotton consumption in India is expected to be better on y-o-y basis in CS 2020-21 backed by likely pick up in normal activities, higher domestic cotton stocks will weigh on prices. Similarly, elevated cotton stocks in the global market are estimated to constrain growth in international cotton prices during CS 2020-21 (beginning August 2020). As per the United States Department of Agriculture (USDA), the stock to use percentage for CS 2020-21 is estimated at a high level of 92 per cent, 5.2 per cent y-o-y fall. The stock to use percentage however had averaged at 75.8 per cent during the period 2015-16 to 2019-20.
Concluding remarks
Courtesy: CARE Ratings’ Cotton & Cotton Yarn Update
Note: Stock to use % is cotton ending stocks (quantity) divided by cotton use (quantity)*100
Footnote:
The article is authored by Bhagyashree C Bhati, Deputy Manager – Industry Research. She can be contacted at: bhagyashree.bhati@careratings.com | Tel: +91-11-4533 3306
Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report.
