The most recent news from the cotton front

The most recent news from the cotton front

In Pakistan the cotton area falls to a 31-year low. In India the monsoon accelerates and opens a more optimistic scenario for cotton. Cotton futures in the USA take gains in two sessions above 10 %

Pakistan cotton area falls to a 31-year low   Pakistan-Flag-hd-Wallpaper

Pakistan cotton area will fall to a 31-year low next season, as farmers switch to more profitable crops, US officials warn.

The US Department of Agriculture’s Islamabad bureau trimmed ideas for the Pakistani cotton crop, thanks to lower than expected sowings, and boosted import demand. Even with an expected uptick in yields, the 2016-17 crop was forecast at just 8.0m bales, down from an earlier estimate of 9.0m bales.

Pest fears

Aside from last year’s 7.0 million bale crop, this would be the smallest harvest since 2003-4.

“While that is not much in the scheme of the global cotton market surplus, any downward revision to production is still a step towards bring supply back into kilter with demand,” commented CBA’s Madeleine Donlan. And the bureau warned that with farmers cutting back on labour and crop spraying, this year’s harvest could be hit by the same pest outbreaks that ravaged the last crop. “Time will tell, but 2016 appears to be shaping up as a repeat, or close to it, of 2015,” the bureau said.

Falling area

Cotton area is forecast to fall to 2.50 million hectares, down 300000 hectares to lowest level since 1985-86.

“Faced with low cotton prices for the second consecutive year, farmers have opted to reduce cotton planting, shifting to corn and sugarcane where possible,” the bureau said.

Corn and sugarcane benefit from a tariff system that insulates farmers from falls in international prices.

The bureau noted that “agronomic, irrigation, and climatic factors limit the degree to which farmers can opt out of cotton” but farmers have switched out of the crop where possible.

Farmers cut costs

And although yields are forecast to rise, the bureau warned that “a repeat of last year’s widespread farmer decision to lower costs for inputs such as insecticides and labour in the face of low market prices continues to be a strong possibility heading into the 2016 harvest”.

The 2015 harvest was hit by widespread pest damage.

The Islamabad bureau noted that “Pakistan’s continued reliance on dated biotechnology makes farmers vulnerable to boll worms, especially pink boll worms, a factor that is worsened if farmers opt not to apply insecticides”.

Pakistani import demand has been revised up some 600,000 bales, to 2.3m bales in the wake of the crop downgrade.

Although still down from last year’s 3.5 million bale imports, these would still be the third highest on record.

Indian monsoon accelerates, boosting crop prospects   Flag-of-India

India’s monsoon is picking up pace, after a slow start, which will help cotton, sugar, and pulse production recover after two years of drought

Monsoon rains across India were 35% above average over the week to July 6, the Indian Meteorological Department (IBD) announced.

“The rains ended dryness in most areas,” said Kyle Tapley, at MDA Weather Services, adding that more wet weather is on its way over the next 5 days.

Deficit turns to surplus

The country’s monsoon was slow to arrive, hitting southern India a week later than usual this year, and was until now running weaker than normal, with June rains 12 % below average. But heavy rains in the first week of July now leaves total rainfall so far this year 1% higher than the seasonal average. This year’s monsoon is expected to deliver above average rainfall over its progress.

Sugar prospects improve

The accelerating of the monsoon will ease fears, after two weaker-than-normal monsoons in a row, in 2014 and 2015.

As well as being crucial for restoring soil moisture after the dry season, the monsoon also replenishes reservoirs, which is key to prospects for the country’s sugar crop, the majority of which is irrigated.

This week the International Sugar Association noted the IMD’s forecast for “plentiful showers towards the latter stages of the season,” which it saw “helping farmers recover from two straight droughts”.

Moisture for summer row crop planting

The increase in soil moisture will is allowing planting to begin for summer crops, such as cotton.

“Monsoon rains have now spread through India and planting is being seen in all production areas,” said Jack Scoville, at Price Futures Group. Other summer-sown crop that will benefit include rice, soybeans, and pulses. Indian lentil and chickpea prices have been soaring due to low availability, after two harvests in a row were hit by lack of moisture.

The profitability of spinning companies in the second quarter of 2016-17 likely to get hit, with domestic cotton prices surpassing international cotton prices, adversely impacting the yarn demand and export prospects for the spinning industry, ratings agency ICRA said.

Domestic prices of ginned cotton have increased significantly—from about Rs 90-92 per kg in April to around Rs 122 per kg now. Slow growth in domestic consumption and stagnation in exports are likely to adversely impact demand and export competitiveness of the Indian yarn, the agency said.

According to Anil Gupta, vice-president, corporate sector ratings, ICRA, slower cotton sowing and decline in cotton sown area apart from cotton stocking by intermediaries could have led to this sharp rise in prices.

As per ICRA estimates, the profitability of spinning industry will be adversely impacted because of the price rise as it faces challenges of slow growth in domestic consumption and high reliance on exports.

Gupta further said that both the factors are a challenge for the mills to sell their production and one can see a decline in capacity utilization and also contribution margins, to prevent inventory build-up. The spinning players, who may have stocked inventories for four to five months in March 2016, may witness improved profitability as they are likely to gain from higher yarn prices.

ICRA said that stability in cotton prices is most critical for a profitable textile industry as it minimizes the risks of inventory losses and the need for a price hike for the existing and future orders.

However, many spinning companies expected cotton prices to be stable in 2016, and the cotton inventory stocking was not beyond two months in March 2016.

India spinning mills’ profitability likely to get hit as domestic cotton prices surge

The profitability of spinning companies in the second quarter of 2016-17 likely to get hit, with domestic cotton prices surpassing international cotton prices, adversely impacting the yarn demand and export prospects for the spinning industry, ratings agency ICRA said.

Domestic prices of ginned cotton have increased significantly—from about INR 90-92 per kg in April to around Rs 122 per kg now. Slow growth in domestic consumption and stagnation in exports are likely to adversely impact demand and export competitiveness of the Indian yarn, the agency said.

According to Anil Gupta, vice-president, corporate sector ratings, ICRA, slower cotton sowing and decline in cotton sown area apart from cotton stocking by intermediaries could have led to this sharp rise in prices.

As per ICRA estimates, the profitability of spinning industry will be adversely impacted because of the price rise as it faces challenges of slow growth in domestic consumption and high reliance on exports.

Gupta further said that both the factors are a challenge for the mills to sell their production and one can see a decline in capacity utilization and also contribution margins, to prevent inventory build-up. The spinning players, who may have stocked inventories for four to five months in March 2016, may witness improved profitability as they are likely to gain from higher yarn prices.

ICRA said that stability in cotton prices is most critical for a profitable textile industry as it minimises the risks of inventory losses and the need for a price hike for the existing and future orders.

However, many spinning companies expected cotton prices to be stable in 2016, and the cotton inventory stocking was not beyond two months in March 2016.

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Cotton futures take gains in two sessions above 10 %   Flag-of-the-USA

The rally in cotton futures faces “resistance” from price competition with alternative fibres, Rabobank warned, even as prices touched limit up for a second session, boosted by surprise estimates from US officials.

New York-traded cotton futures for December hit 74.78 cents a pound in early deals on July 13, 2016 soaring the expanded, 4.0-cent limit on daily price moves set by the Ice exchange.

The surge – which took the contract to a two-year high for a nearest-but-one lot – followed a limit-up move in the last session too, and took price gains in two sessions above 10 %.

The contract had eased back to 73.27 cents a pound as of 05:05 New York time (10:05 UK time), although this remained up 3.5 % on the day.

Caught by surprise

The price surge was fuelled by a downgrade by the US Department of Agriculture on Tuesday of 3.4 million bales to 91.3 million bales in its forecast for world cotton inventories at the close of 2016-17, which begins next month. The downgrade, which took the stocks estimate to a five-year low, was more than double the 1.5 million bale cut expected by analysts.

“While a reduction in global ending stocks was not unexpected given the strong uptake seen at Chinese reserve auctions this year, the scale of the fall appears to have caught the market by surprise,” said Madeleine Donlan at Commonwealth Bank of Australia. “Ongoing weather concerns in US cotton regions also added to the market’s momentum.”

Switch to alternatives fibres

However, Rabobank, which was been one of the more bullish commentators on cotton, cautioned that the rise in prices could be curtailed by competition with synthetic competitors, such as polyester.

While cotton values worldwide “will be supported by tighter available supplies in major consuming states… higher prices and the subsequent switch to alternatives fibres should provide resistance going forward”, Rabobank said, Rabobank analyst Charles Clack told Agrimoney: “There may be a move to blend more fibres like polyester into textiles.This is not a trend that is likely to happen immediately, bit it is something to look out for in the coming months.”

Very strong sales

The USDA’s lowered forecast for world cotton stocks at the close of 2016-17 reflected in the main a downgrade of 3.0 million bales, to 51.7 million bales, in the estimate for inventories in China, after success in a programme of auctions designed to run-down huge state stockpiles.

“Sales from China’s State Reserve have remained very strong, despite rising prices,” the USDA said, noting that sales had reached 1.18 million tonnes, at a base sales price which has “risen steadily and has reached just under USD 90 cents per pound. Volumes offered and resulting sales remain at levels consistent with the officially-announced 2 million tonne sales target being met just before the end of August, the announced cut-off for reserve sales.

“With these strong continuing auction sales, and other market data, indicating more mill use than previously thought, USDA has revised China’s consumption forecast up substantially,” by 1.5 million bales to 35.0 million bales.

Concerns over disease and pests

The USDA also cut its forecast for Indian cotton production in 2016-17 by 500000 bales to 27.5 million bales, thanks to a drop in sowings amid “concerns over disease and pests such as whitefly, late monsoon rains, and lower cotton prices”.

For Pakistan, the harvest estimate was downgraded by 1.0 million bales to 8.0 million bales, again thanks to a drop in expectations for plantings.

“Corn and sugarcane producers benefit from tariffs that insulate domestic market prices from the international market, while cotton producers face lower prices and competition from cotton imports.”

Sharply higher exports

For the US itself, the USDA raised the production forecast by 1.0 million bales to 15.8 million bales, reflecting the higher sowings number unveiled by an official report two weeks ago.

However, the boost to supplies was offset by an upgrade of 1.0 million bales to 11.5 million bales in the forecast for US cotton exports in 2016-17.

“Exports are projected sharply higher due to the larger US supply and an expectation of continued tight foreign stocks,” the USDA said in its flagship monthly Wasde crop report.

The estimate for the cotton price that US farmers will receive for this year’s harvest was lifted, at the centre of the range, by 2 cents a pound to 59 cents a pound, taking it above the 58 cents a pound estimated for the 2015 crop.

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