Business

Four Why's Of Cotton Market

WHY did cotton price go up?

The market reacted to rumours regarding crop size of three major cotton players in the world -India USA and Pakistan....

WHY it did not cross 80 cents?

China stockpile of cotton is still being auctioned...if there was no Chinese stock reserve cotton could have gone up a bit higher as China is the biggest buyer of US cotton.

WHY it is back in the range of 68 cents before the rise 40-50 days?

US government buys cotton from farmers and sells it to trading companies. Trading companies have manipulated the market on rumours and news regarding crop sizes and sold cotton. As shipment is for October, they have again manipulated the market with better reports of crop size in India, USA and Pakistan, so that they can cover their sales.

So, what is the ground reality?

If we look at the world consumption and production and ignore the Chinese stockpile of cotton (which will be over in a few months as it is being auctioned for two years now) for this year, then figures are almost same. In the previous two years, gap between production and consumption was huge due massive stockpile of cotton by the Chinese state. Now China will enter the cotton market in the coming months for US cotton.

Crop size in Pakistan is expected to cross the 10 million mark, to reach 12-14 million. Only once in the last five years cotton crop was less than 10 million balesbeacuse of floods and heavy rains. Pakistan's consumption of cotton is around 10-11 million bales a year. Crop size in India is a hot debate as there are rumours of small crop in India basically beacuse of actions of the government, rather than the vagaries of weather.

The government has been discouraging farmers from growing cotton, following last season's pink work, white fly attacks. And the bumper crop of the last few years had made it difficult for farmers to sell cotton, so the government had to buy the cotton. That aside, the average Indian crop size is 35 million bales, and local consumption is 32-33 million bales. A shortfall of 5 million bales as is being predicted by some agencies, could lead to a short supply of the fibre in the market. A clearer picture will emerge over the next one month. Global prices of cotton at this moment depend a lot on how India's cotton crop turns out. If cotton is sufficient, then prices would stay in the range of 66-68 cents. However, if there is a shortfall of Indian cotton, Indian mills will also have to import US cotton, alongwith Chinese mills, pushing up demand and thus prices of the fibre.