Indian physical market runs at a negative basis for a long time. After appreciation of rupee, basis narrowed from -5 to – At present scenario India is on a reasonable basis.
Usually India sells abroad at 300 to 500 on NY in the normal season. Cotlook usually remains 9 to 10 onto nearby NY. In other words India sells 400 to 600 Of to cotlook in normal season.
Due to pandemic this year’s futures fluctuated fast but physical cotton never followed back to back.
When the future went down to 48 cotlook – NY spread broadened to 1300 On. And when it turns to lower 60 or mid 60 cotlook – NY spread narrowed to just 400 to 600 on.
Cotlook shows physical trade done in the far east.
Currently cotlook is 600 on as compared to NY. At present Brazil is the main seller of new crops and it is offered near to cotlook prices. Main season of big producers like the US and India will start after one month.
Future is not stronger due to fundamental reasons but it looks like more money power from index funds has given good support to the futures. In developed countries interest rates are near to zero so new printed money comes to the commodity futures. Spec long and index funds are long in futures but trade is almost a regular seller. Brazil’s first growth needs to sell new crops so they have a,reduced basis to increase demand. In other words, demand is so poor that on arrival Brazil has to stay cheaper to obtain a good market share.
Look at the spread nearby ICE with the cotlook index. It is lowest in August below 400 on. And highest is 1300 on during April. Due to the effect of pandemic when ICE was under pressure in April and went below 50 but physical sales were higher so spread was 1300 on. When ICE got in the low 60 or mid-60, spec and the fund pulled the future but demand was slower so physical selling continued ignoring the future.
Currently physical demand is a bit slow so wherever the arrival is, they have to reduce basis and stay cheaper to get their market share.
With more power of specs and funds, the future has lost correlation with fundamentals. It is risky to hedge futures without understanding current correlation of physical and futures. On call trade may give more disadvantages with higher fluctuation.
India consumes 80 to 90% of its own crop so the basis does not work back to back like arithmetic but it works as chemistry of domestic sentiment.
First time in history Indian new season starts with a huge opening stock. Government agencies have to offload nearly 75 lakh bales. MNC and trade are also in line to sell their nearly 25 lakh bales. New season of India is knocking the door. Compared to other countries, India has to stay cheaper to get export orders. Usually Indian cotton is the last choice for abroad buyers unless it’s prices look more attractive. If Brazil is offering 600 on then Indian Cotton gets inquiry at maximum 200 on. After appreciating rupee Indian cotton is not cheaper but almost at par to the sales in the export market.
We should understand that futures are not at a value like the basis worked previously. Nowadays the basis has been reduced by 5 cents to all origins, so Indian prices at negative 200 are reasonable compared to the world. And in future with force of arrival Indian basis may get more pressurized.
Usually Indian basis remains cheap with force of arrival in the opening season while remaining costly during off season. So we will see pressure on Indian basis as arrival begins. CCI has a major role in movement of price in India. If they sell all old cotton, domestic users will not want new cotton. If CCI purchases aggressively, the new cotton rate will not be viable. But for genuine comparison cotlook is a real tool for global comparison.
Motive of the article is to define that as compared to global offers in the export market Indian offer is not cheaper but very close to being at par.
