March 12, 2013
With the global cotton crop forecast lower by 14% in 2013-14, cotton prices have started strengthening in international markets and have reached an 11-month high. Sensing an export opportunity, leading multinational traders have become buyers of Indian cotton, leading to a price spurt.
International Cotton Advisory Committee said the global production is forecast to decline 14% to 22 million tonne. Rabo Bank also said, "Soyabean and corn continue to limit cotton acreage despite current uptick in prices."
Rabo Bank, a leading financier for agriculture, said the US cotton crop may fall by 18%. Reports of lower cotton crop led to a surge in prices on international markets. In the US, cotton is trading at an 11-month high at 88 cents per pound, while in India also the benchmark Shankar-6 variety is at its highest after August last year at Rs 10,770 per quintal while MCX cotton futures are at Rs 19,070 per bale (170 kg).
Sensing an opportunity in exporting cotton from the country, some of the leading multinational trading companies from India have started buying and stocking cotton for exporting.
They eye arbitrage as Chinese government is forcing local mills to buy cotton from the state agency at a price which is significantly higher than international benchmarks. While US cotton is at 88 cents per pound, the Chinese state agency is selling it to domestic mills at $1.20 to $1.47 per pound.
Chinese mills can import cotton which is limited to half of local purchases. However, Indian cotton cost them around 90 cents. Hence, Indian cotton is in demand in China as it helps mills there reduce their average cost.
MNC traders based in India have started buying cotton from local market and shipping it to China. They buy in the Indian spot market and sell domestic futures on MCX or in international markets. The other alternative is to buy spot cotton in India and export directly. Traders say that there is an opportunity to make a 2% arbitrage margin. An official from one of the leading MNC trading companies confirmed the trade, but declined to come on record.
Trade circles estimate that MNC traders have bought around a million bales of cotton recently. Along with their buying, the state procurement agencies like Cotton Corporation of India and NAFED are estimated to be holding over 3 million bales of cotton. Such large quantities in a few hands also keep prices higher.
While exports were on a slow track till recently, the momentum is expected to continue as nearly 7.5 million bales are said to be registered with DGFT for exports. The Cotton Advisory Board has estimated 8 million bales of exports in the current cotton year (October 2012-September 2013). Any further increase in cotton exports will start pinching domestic cotton-starved mills. (Source: Business Standard)