May 18, 2012

India's 2012 cotton area may decrease 10% on weak demand

Following a series of policy changes that may have undermined purchasers' confidence in exporters' ability to fulfil contracts, India's cotton area will likely shrink 10% this year due to low prices and weak demand from China.

"Import demand for Indian cotton is very poor. China has stopped buying, more or less," Cotton Association of India President Dhiren Sheth told Dow Jones Newswires Thursday (May 17).

This is bad news for the cotton industry in the world's second-largest producer, which had been looking forward to strong exports--70-80% of which are usually shipped to China--after producing a record 34.7 million bales during the marketing year ending September 30.

Farmers are likely to switch to more lucrative crops this summer, given the flagging demand, which has been exacerbated by a series of government moves that unsettled the market, beginning with a decision in early March to ban cotton exports that was partially lifted a week later.

The government late last month announced that it had removed all restrictions on cotton shipments, but then reinstated a registration requirement last week that limits the number of bales a shipper is permitted to handle at a time.

"The world is thinking that it's better not to buy from India, as it is unreliable," Cotton Association of India Treasurer Shirish Shah said, "because the government can ban exports anytime."

"China has got enough stocks," he added. "They can [also] buy from Australia, Brazil and West Africa." Chinese traders said that cotton warehouses at major China ports are almost full.

Meanwhile, buyers in China and elsewhere may be putting off purchases in anticipation of a further decline in international prices. In mid-April, Indian prices were 10% lower than global prices, but the gap has "more or less" disappeared, Indian Cotton Federation Secretary A. Ramani said.

Benchmark cotton futures in New York dropped to their lowest settlement Wednesday since February 2010, as prospects for robust global supplies kept the downtrend intact.

Last week, the USDA forecasted a 9% increase in cotton production in the US, the world's largest exporter of the fibre. It also estimated ending global stockpiles of cotton would rise to a record of 73.75 million bales by July 31, 2013.