Indian cotton yields improve though delivery and offtake struggles
Cotton production prospects are good for market year (MY) 2016/17 though arrivals are delayed. The supply chain is managing through the Government of India demonetization effort as traders and producers report issues with payments and movement of cotton within the domestic market. The consumption forecast is lowered with limited mill buying. Since the demonetization announcement the Indian currency has weakened by 3 % against the U.S. dollar and provided unanticipated export support
Production remains unchanged though area expected marginally downward
The Post forecast for MY 2016/17 remains unchanged at 27 million 480 lb. bales (34.6 million 170 kg bales/5.8 million metric t) with planted cotton area estimated at 10.5 million hectares on official data. The yields are expected to be the second highest on record at around 560 kg/hectare. Marketing year 2014/15 and MY 2015/16 levels are based on previous releases of official production.
Limited arrivals as farmers unable to pay seasonal workers or receive cash for crop
On November 8, 2016, the Government of India announced the cancellation of existing INR 500 and INR 1000 valued bills as legal tender as well as an exchange plan for new bills. The announcement was accompanied by restrictions on cash withdrawal limits for all citizens. Trade sources indicate that the announcement has led to the disruption and delay in cotton arrivals as cotton farmers are unable to pay contract labourers to harvest the standing crop. In cases where farmers harvest a crop, they are reluctant to bring it to the market yard as they cannot receive adequate cash for the crop though they can, if they have a bank account, receive payment by check or online bank transfer. Still, however, withdrawal limits exist and farmers don’t have immediate access to the deposited check or online payment.
Trade sources indicate daily cotton arrivals to be slower by 25 % from last year and attribute the slowdown to cash availability. Sources expect arrivals to be further delayed in the coming weeks which could lead to strong pressure for arrivals and some price impact.
Consumption to reduce as cash limitation limits buying
Post forecasts cotton consumption for MY 2016/17 is 23.5 million 480 lb. bales (30 million 170 kg bales/5.1 MMT). Posts estimate is 500,000 480 lb. bales lower than the USDA forecast. Average monthly mill consumption in MY 2016/17 so far is around 1.86 million 480 lb. bales as compared to 1.97 million 480 lb. bales during same period last year.
Trade sources indicate a short-term reduction in overall cotton consumption in MY 2016/17 based on the recent demonetization announcement. The expected drop in demand across the cotton supply chain has prompted spinning and textile mills to voluntarily reduce their shifts and lower production output. Traditionally the pace of cotton arrivals in the market is strong in November and December when mills are actively buying in large quantities. In the latest scenario, purchases are limited to covering immediate requirements.
Mill stocks of cotton and cotton yarn in September 2016 as reported by the Textile Commissioner Office were lower than the three-year average. At the consumer end, there is a visible decline in the buying of premium products in the apparels sector. The unorganized and small scale textile sector, which is primarily based on cash transactions, is witnessing a decline in demand.
Marketing year 2014/15 and MY 2015/16 levels are based on previous releases of official consumption.
FAS Mumbai’s MY 2016/17 export forecast is 4.2 million 480 lb. bales (5.3 million 170 kg bales / 914,000 MT). Since the GOI announcement on November 8, the Indian rupee has become weaker against the dollar by 3 % which provided a boost for exports. November exports were the highest period of the marketing year with a rise in shipments to China of the new 2016 Indian crop. Shipment data also revealed that there was some Australian cotton sent from southern India to China during the month of November. Bangladesh and Vietnam were the other major export markets of Indian cotton. Trade sources indicate that cotton and cotton yarn shipments are expected to remain slow for the remaining part of MY 2016/17 as global demand remains weak.
MY 2016/17 imports are estimated at 1.8 million 480 lb. bales (2.30 million 170 kg bales/ 392000 MT). While there was a surge in imports at the start of the marketing year, import shipments have reduced by 60 % from the previous month as the new, domestic crop started showing up from late-October onwards. The United States, Australia, and Egypt were the three largest supplying countries in November.
Marketing year 2014/15 and MY 2015/16 levels are based on previous releases of official trade data.