Deficient rains likely to lower cotton production and improve prices; positive for yarn manufacturin

Report by IndiaNivesh

Deficient rains likely to lower cotton production and improve prices; positive for yarn manufacturing companies

Cotton growers in Maharashtra, Gujarat and Karnataka are expected to be hit due to a deficit monsoon. If there is no rain in the next 10 days, a drought‐like situation might come about.

The cotton season ends on September 30 and the new one begin on October 1.

With a 10 per cent fall in sowing and a deficit in rain‐fed states, experts estimate a crop of 35 mn bales for 2015‐16 (though Cotton Corporation of India estimates 37 mn). This depicts a trend of output decline, from 40.73 mn bales in 2013‐14 to an estimated 38 mn in 2014‐15 and 35‐37 mn in 2015‐16.

CCI has a stock of 2.5 million bales and is expected to have an opening stock of a million bales on October 1.

Prices have firmed up by Rs 1,000 a candy (356 kg) in the past three weeks. Prices have spiralled as traders are liquidating less stock in anticipation of late crop arrival. The benchmark Shankar‐6 variety is trading at Rs 35,500 a candy, having risen by three per cent in three weeks.

Our take

Lower production of cotton is likely to be favourable for cotton prices. Cotton prices are currently hovering around the minimum support prices. After touching a low of Rs 29932 per candy, the prices have now improved to Rs 33838 per candy. With expected lower production in the next cotton season, the prices could firm up and reduce the downside risk in prices. India is a net exporter of cotton and hence domestic companies are not likely to face any difficulty in procuring cotton, despite lower production.

For cotton yarn companies, this would be favourable as they would be able to get better realisation for products. The fabric and garment manufacturers could experience an improvement in their profitability with a lag effect.