Cotton prices in India are witnessing a consistent fall for the past few months. The fall in prices can be attributed to the expected record harvest this season owing to increased acreage, subdued demand from the domestic mills and fall in export demand from the top buyer China. India's bumper crop, rising international inventories and subdued demand from China is likely to drive the cotton prices further down, accroding to CARE Research.
During the current year (2014-15), the area under cotton cultivation in India has further increased to reach record level of 125 lakh hectares. There has been sharp increase in cotton acreage in Gujarat, Maharashtra, Karnataka and Andhra Pradesh. In the current year, India had witnessed lower than normal monsoons early in the rainy season, which propelled many farmers to switch to planting cotton, which needs less water to grow, leading to all time high cotton acreage of India. In addition to that, owing to the heavy rains during the end of the monsoon season, India is expected to have a bumper crop this season. All time high acreage coupled with expected bumper crop is all set to push India’s cotton production to a new level. Indian Cotton Federation (ICF) estimates a record harvest of 40 million bales during 2014-15, a growth of about 8% over 37.5 million bales in 2013-14.
''Currently, the demand for cotton from domestic yarn mills is on the lower side on account of the higher domestic cotton price as compared with international prices coupled with lack of quality cotton worth spinning as well as existing high inventory with yarn mills,'' it said.
''Owing to the delayed sowing due to delayed monsoon during current season, arrivals are expected to delay by a month or two and good quality cotton is expected to come in late November or early December. In addition to that, mills already have inventory from last season's stock, which is resulting in lower demand for cotton in domestic market.''
''The demand for cotton in international market is sliding, which can be largely linked to China's new cotton policy, as China constitutes about 60% of the India's cotton exports. Cotton export from India is estimated to fall from high of 11 million bales in 2013-14 to 6-7 million bales in 2014-15.''
''Falling international demand and prices of cotton will have an impact on domestic yarn prices too. In the short to medium term, on the back of the expected record production of cotton and subdued export demand the cotton prices are expected to remain soft,'' added CARE Research.
''China is the biggest consumer of the Indian cotton and with China cutting its cotton imports, India may have to look for other markets for its production. Countries like Bangladesh, Vietnam and Pakistan can be potential importers for the Indian cotton.''
''The role of the Indian government also becomes significant in this scenario with its intervention in terms of buying cotton at MSP for sustaining the prices. The record crop has already forced the Indian Government to start buying cotton at MSP from the market and it may have to procure about 8 million to 10 million bales of cotton at MSP during the current season to support the prices as compared to 40,000 bales which it purchased last season.''
CARE has outstanding ratings in textile sector for 535 entities, the rating distribution of which is given in the following graph. CARE's Modified Credit Ratio (MCR) for textile sector for FY14 and H1FY15 was 1.27 and 1.34 respectively which signifies improving credit quality of the rated entities during the period. Considering the challenges faced by the textile industry, the sustainability of these improvements remain to be seen.
