Trade with Commodities: Cotton: Stable in the coming year

However, the government decision on offloading stocks from state reserves will be key in driving domestic prices.

Asurplus situation for the third consecutive year in a row has led cotton markets across the globe to remain under pressure over the past oneand-a-half years. However, despite sufficient availability, prices have shown signs of recovery since the beginning of 2013 due to the robust demand from the largest consumer, China, and expectations that the US may witness a sharp fall in cotton acreage in 2013. In the domestic market, too, cotton prices have been on an upward trajectory for a couple of months due to dwindling supplies and expectations of higher exports amid sharp recovery in the global prices.
    Cotton prices in the global markets are largely influenced by the demand-supply situation in three major producing and consuming countries — China, India and the US. According to the latest data released by the International Cotton Advisory Committee (ICAC), cotton production is likely to fall by 9.7% to 23.47 million tonne in 2013-14 starting 1 August this year. Global consumption will reach 23.71 million tonne in 2013-14, marginally higher than 23.41 million estimated for the 2012-13 season and, hence, stockpiles will fall next season to 16.44 million tonne from record high levels in 2012-13.
    China is central to any discussion on cotton markets since it is the world's largest producer (27% share in global production), consumer (40%) and importer (38%). Another reason for China's commanding influence in the market has to do with government policies, which have seen it buy about 10 million tonne or 60% of the world's cotton stocks since 2011, when the country started building its reserves. The Chinese cotton policy functions through government reserves and import quota. However, the introduction of higher minimum guaranteed price in March 2011, which coincided with peak global cotton prices, resulted in a huge gap between the Chinese and global cotton prices. This led the Chinese spinning mills to become uncompetitive in the global markets, resulting in a sharp drop in consumption. Its production, 32
    million bales (1 bale = 480
    pounds) in 2009-10, rose
    to 35 million bales in 2012-13. On the other hand, its consumption declined by 28% in the same period to 36 million bales. According
    to China Cotton Association, the nation will continue its controversial cotton stockpiling policy this year, which will continue to boost the imports.
    The US, which is the largest supplier of cotton to China and the global markets, may see a drop in acreage and output next year beginning August 2013. According to USDA's National Agricultural Statistics Service (NASS) report, the decline is because of the price slump and demand erosion, which has pushed the growers to shift to more remunerative crops. Based on a survey of 83,500 farmers, the USDA estimated upland cotton plantings would drop by 19% to 4.1 million hectare. With the expected drop in the US acreage, the world acreage and output may be adversely hit in 2013-14.
    India commands importance in the global markets as it is the second largest producer, consumer and exporter of cotton. In fact, market participants across the globe are eyeing the cotton trade policy developments in India as it supplies a significant part of its produce to the global markets. It witnessed a sharp rise in yield after the introduction of genetically modified cotton seed, BT Cotton, in 2002-3, which altered the country's status from net importer to net exporter. In the past 10 years, domestic production has surged dramatically by around 153% and stood at 35.5 million bales (1 bale= 170 kg) or 6.03 million tonne in 2011-12, while the consumption has increased by 54% to 26 million bales or 4.4 million tonne, leaving a big scope for exports.
    After exporting a record 12.95 million bales in 2011-12, the exportable surplus in India is estimated at 8 million bales by the Cotton Advisory Board. This is due to the 7% decline in production to 330 lakh bales in 2012-13. The current estimates for production, consumption and exports point to stable prices in the crop year 2012-13. However, exports are set to cross the surplus levels and the government decision will be key in driving domestic prices. If it considers offloading stocks from the state reserves, the prices may face downside pressure in the short term.