Current Scinario Of Cotton Market

Bullish Factors for New York Future

1. U.S. Crop Reduction: A reduction in U.S. crops could potentially lead to a bullish market, as decreased supply often results in higher prices.
2. China Buying for Reserve Stock: If China is actively buying commodities like crops for its reserve stock, this increased demand can drive up prices in the market. It signals a strong demand, which is typically bullish.
3. On-Call Sales High: High on-call sales suggest a significant amount of contracted but undelivered goods, indicating strong demand. This could contribute to a bullish market sentiment.
4. Speculator and Fund Activity: Speculators and funds have actively investing in the market in large quantities, it has create upward pressure on prices. Their actions can amplify market movements and contribute to a bullish trend.
5. Major Crop in the Hands of Merchants: Major crops are held by merchants, it could imply reduced immediate supply in the market. This scarcity may lead to higher prices, contributing to a bullish market.

Bearish Factors for New York Future

Let’s analyze the mentioned factors that could contribute to a bearish outlook for the New York futures market:

1. Main Crop Held by Merchants with Expiry Pressure: If merchants are holding a significant portion of the main crop and face the necessity to offload before a specific contract’s expiry (e.g., June 23 in this case), it could create selling pressure. The negative spread between old and new crops might incentivize them to sell quickly, potentially driving prices down.
2. Merchant Bringing Certified Stock: If merchants introduce certified stock on exchange, it can contributing to a bearish market sentiment.
3. Large New Crop Prospect: The anticipation of a large new crop (around 16 M Bales) can lead to expectations of increased supply. If the market perceives that the supply will exceed demand, it can result in a bearish sentiment, causing prices to decrease.
4. Shift to other fibres: Certainly, changes in interest rates, inflation, and overall macroeconomic conditions can have significant impacts on the textile industry. These factors can influence the demand for cotton and potentially shift it towards other fibers:

In response to higher costs associated with cotton, both manufacturers and consumers may turn to alternative fibers such as polyester, rayon, or synthetic blends. These fibers may offer cost advantages, and advancements in technology have improved the quality and performance of these alternatives.

Bullish Factors for Indian Cotton

Now we outlined several bullish factors for the Indian cotton market. Let’s break down and elaborate on each point:

1. Cost Advantage: The assertion that Indian cotton is the cheapest in the world could be a significant bullish factor. This cost advantage may attract buyers and contribute to increased demand for Indian cotton.
2. Export Potential: The attractive basis for Indian cotton might stimulate higher-than-expected exports. This could be due to the competitive pricing, making Indian cotton a favorable choice for international buyers.
3. Reduced Farmer Inventory: Indian farmers have already sold most of their cotton produce, it suggests reduced inventory. This could create a supply-demand imbalance, potentially driving prices higher as demand continues.
4. Import Duty: With an 11% import duty, it becomes less viable for Indian mills to import cotton other countries.
5. Merchant Challenges: Merchants find it difficult to sell at current basis levels, it implies a potential upward pressure on prices. As merchants take time to adjust to market conditions, it could create an environment favoring higher cotton prices.
6. CCI Influence: The mention of C.C.I. (Cotton Corporation of India) consistently pricing cotton higher could be seen as a positive indicator. If C.C.I. tends to set higher prices, it might act as a benchmark, supporting overall bullish sentiment in the market.

Bearish Factors for Indian Cotton

Here are some bearish factors for the Indian cotton market based on the points:

1. Increased Crop Size: The Indian cotton crop size is expected to be larger than initially estimated, it could lead to a surplus in supply. A surplus tends to put downward pressure on prices.
2. Regular Farmer Sales: Indian farmers are consistently willing to sell their cotton, it indicates a steady flow of supply into the market. This regular selling behavior might contribute to oversupply and potentially weigh down on prices.
3. Cash Blocked in Cotton Seed: Ginners have a significant amount of cash tied up in cotton seed, it could limit their flexibility and ability to respond to market dynamics. This might lead to slower adjustments in response to changing market conditions.
4. C.I. Quality and Terms: If the Cotton Corporation of India (C.C.I.) is offering good quality cotton with attractive terms and conditions, it may divert demand towards C.C.I. This could potentially lead to reduced demand for cotton from other sources, affecting market prices.
5. Weak Demand for Value Addition: The demand for cotton from mills for value addition is not showing improvement, it suggests a lack of strong demand for processed cotton products. Weak demand for value-added products may result in lower overall demand for raw cotton.

Current Mill’s Situation in India

1. Inventory Overhang: Mills are holding a 2-month inventory, it suggests that there is already a significant supply of cotton available to meet their production needs. An oversupply situation could result in reduced urgency for mills to make additional purchases in the short term.
2. Limited Buying Pressure: With ample inventory on hand, mills may not feel compelled to engage in aggressive buying. This limited buying pressure can contribute to a subdued demand scenario in the physical cotton market.
3. Pressure on Market Prices: The combination of abundant inventory and limited buying interest can exert downward pressure on market prices. Sellers may need to adjust their pricing to attract buyers, potentially leading to a decline in cotton prices.
4. Delayed Adjustments: The presence of a 2-month inventory may also mean that mills can afford to delay purchasing decisions until they observe clearer signals of increased demand or a change in market conditions. This could result in a slower market response to changing dynamics.

Ginning situation in India

1. Good Job Work for Ginners: The fact that Indian ginners are experiencing a good job work situation suggests that there is demand for ginning services. This can be indicative of a healthy processing industry, which is an essential link in the cotton supply chain.
2. Funds Blocked in Cotton Seed: The mention of funds being mainly blocked in cotton seed indicates a financial aspect of the ginning process. This could mean that ginners have invested a significant portion of their funds in processing cotton seed, potentially affecting their liquidity for other operations.
3. Attractive Basis for Merchants and Exporters: The attractive basis for merchants and exporters implies that they are finding the current market conditions favorable for buying cotton. This could be due to competitive pricing or other incentives that make cotton purchases attractive for these market participants.
4. Regular Ginning Operations, Slow Mills Buying: Gins are running regularly while mills buying is slow is noteworthy. Regular ginning operations indicate ongoing processing activities, but the slow pace of mills buying may be linked to factors such as existing inventory levels or a cautious approach by mills in response to market conditions.

In summary, the ginning situation in India seems to be influenced by both positive and cautious elements. The demand from merchants and exporters, coupled with regular ginning activities, reflects a dynamic market. However, the slow buying from mills could be indicative of a more conservative approach from this sector, possibly influenced by factors like existing inventory levels or market uncertainty.

Conclusion

Post-COVID Demand Surge:

In the initial phases post-COVID, many regions experienced a surge in demand as economies reopened, and people, with increased purchasing power due to government stimulus packages, returned to shopping.

Empty shelves and pent-up demand contributed to a rapid recovery in consumer spending, boosting various industries.

Current Economic Challenges:

The current scenario, involves higher interest rates, inflation, and geopolitical tensions such as war in different regions. These factors can indeed lead to a reduction in the purchasing power of the common man.

Higher interest rates make borrowing more expensive, inflation erodes the real value of money, and geopolitical uncertainties can contribute to economic instability.

The combination of these economic challenges could dampen consumer confidence and lead to a slowdown in spending. With higher prices due to inflation and potentially increased borrowing costs, consumers may become more cautious about their expenditures.

In such circumstances, the physical demand for goods and services may not follow a straightforward trajectory. It may face headwinds due to the constraints on consumer purchasing power.

A combination of higher interest rates, inflation, and challenging macroeconomic conditions can create a scenario where the demand for cotton-based products may decline. This can lead to a shift towards other fibers that are more cost-effective and align with consumer preferences in terms of price and sustainability. The textile industry is dynamic, and various factors contribute to the choices made by both producers and consumers in response to changing economic conditions.

It’s important to note that commodity markets are influenced by various factors, including global economic conditions, weather patterns, and geopolitical events.

Over all the upcoming months from July to December are anticipated to pose challenges for merchants due to invrse unless the current situation undergoes a significant change.

In the later part of the season in India, the market is expected to be dominated by both the C.C.I. and merchants.

Furthermore, there is a positive outlook for Indian mills, particularly they are spinning the cheapest cotton. These mills are likely to secure substantial orders from abroad, driven by their competitiveness. Although this development may take some time to materialize, a prosperous period lies ahead for Indian mills.

Ajaykumar & Co. Ahmedabad