Cotton Weekly

[Document subtitle]

VAMSIKRISHNA K Tuesday, September 13, 2022

Cotton Weekly

Cotton prices consolidated last week, after the sharp decline the week before when prices fell from a
high of 118.53 to a low of 103.21 before ending the week near the lows itself, ending the 5 week
gaining streak since second week of July, barring the first week of August.

Crop and Weather Info

The latest USDA report on overall crop production and demand, has pegged the world cotton
production at 118.45 Million bales (480 pounds per Bale) higher than both previous year (2021-22)
estimates as well as August projections for 2022-23 crop calendar year due to increased acreage. At
the same time the department has marginally lowered the annual mill consumption to 118.63 million
bales, down from projected figure of 119.09 in August and an estimate of 119.46 for 2021-22.

The rise in overall crop production can be attributed to increase in US crop projections by 1.26 million
bales to 13.83 as a slightly favourable weather has increased the chances of marginally higher
production. The impact of floods in Pakistan, while devastating at a human level, is expected to have
slightly lesser impact on overall crop production than what was expected earlier. Sindh region, which
is a major producer accounting for almost 1/3rd production of Pakistan, reportedly starts picking
cotton from the month of July with almost 1/3rd crop estimated to be picked by August end. Pakistan
ginners association suggested that total arrivals by August end were less by 1/3rd when compared to
previous year. Also the overall crop acreage is said to have been lower in Sindh region by almost 20%
when compared to previous year. Thus a combination of early harvest and lesser acreage is expected
to limit the overall crop loss to 1.5 million bales.

While the production in US was bumped up Indian supply projections remain unchanged for now from
previous month, though the beginning as well as ending stocks were increased by 0.1 million bales.
Cotton Association of India (CAI) estimates that if weather remains favourable, overall crop production
can reach 350 lakh bales +/- lakh bales. Even USDA is projecting an increase of 3 million bales over
2021-22 estimates of 24.5 million bales. The monsoon has been favourable till date with Central as
South Peninsula receiving above normal rainfall with North-west region also receiving near normal
rainfall. Mr Atul Ganatra, president CAI, indicated that only excess rains in the month of October can
damage the overall crop supply in India.

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The US crop situation has improved due to favourable weather conditions. As can be seen from the
chart above, the area of crop that was under severe drought has receded from a high of 52% towards
last week of July to 31% as of September 6th. The overall crop under Fair and Good conditions also
increased from 69% to 74% as of 7th September. While the improved weather conditions may be too
late salvage most of the crop, it nevertheless helps increasing the overall production from the worst
case estimates in the months of July and August.

Demand

The intake by the mills is still lagging with many unofficial reports suggesting that export orders at
major garment exporters such as Bangladesh, are either being reduced or postponed all together.
Fears of a recessionary global economy are pushing the outlook for overall demand lower, as can be
noted in the latest USDA projections, which had reduced the overall consumption, albeit marginally.
High inflationary pressures in much of Europe and US, together with the stance of Central Banks,
especially US Fed, that increase in interest rates is inevitable to bring inflation under control is only
adding to the recessionary fears as higher cost of funds would lead to decrease in consumption.

While an increase in interest rates should ideally bring inflation under control by squeezing out
liquidity, the recent jump in inflation is not just demand induced but also supply induced due to the
bottlenecks in supply chain after covid pandemic and the recent Russia-Ukraine war. As such higher
cost of funds would not only lead to squeeze in liquidity, but fears are that higher cost of funds would
actually make the supply situation even worse. On top of that Europe, which is heavily dependent on
Russian energy, will be facing a tough winter ahead. With tensions between EU and Russia, any
disruption in energy supply can make a bad situation worse, pushing energy prices higher and
increasing inflation.

China, which is top importer of cotton is expected to see a drop in overall imports as domestic demand
is projected to reduce due to broad slowdown in economy. In fact with lower yarn prices, there are
reports that China is actually looking to export yarn to Indian subcontinent. It is important to note that
the consumption figures of USDA, even after minor reduction from August are still above the Cotlook
projections of 114.5 million bales.

The US global trade report has not been released over the last two weeks due to technical glitches
and the weekly report is expected to be released from next week.

Technical Outlook

The technical outlook for the week ahead looks inconclusive for now with prices expected to move in
the range of 111.5 and 101.5. Only a close beyond either levels can trigger price action in that
direction. A close above 111.5 can push prices towards 118 levels, while a close below 101 levels can
trigger a fall towards 97 levels. While there is marginal bullish bias, given last week’s close after the
sharp decline, it isn’t strong enough for now to trigger any major upside move.

The commitment of traders report, published by CFTC (Commodity Futures Trading Commission), USA
reported that Hedgers/Merchants/Producers were net short by almost 70,000 contracts (ICE futures
& options) as on 6th September suggesting that they were holding a bearish view for prices. On the
other hand Fund investors were predominantly on the long side by almost 50,000 contracts indicating
bullish stance. This contradictory stance quite reflects the overall situation in the market with lack of
clarity on overall price direction in the near to medium term.

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