Bullish outlook for sugar, cotton

Bullish outlook for sugar, cotton

Last Updated: Sun, Apr 07, 2013 19:51 hrs

India is among the top five producers of two agri commodities globally - sugar and cotton. Due to supply factors, the near-term domestic outlook for the two commodities appears positive, barring the risk of a sharp increase in imports.

Ex-mill sugar M (medium) grade spot price at Kolhapur could rebound from Rs 3,050 per 100 kg to Rs 3,250 level through the April-June quarter. Sugar consumption is at a seasonal high during summer. On the supply side, the government recently announced non-levy quota for six months up to September 2013 at 10.4 million tonnes (mt). This is about 400,000 tonnes higher than that in the past three seasons but with no monthly sales restriction, this time around mills will have the flexibility to time their sales. Besides, the scrapping of the levy and non-levy quota release mechanism (assuming the April-September non-levy quota is still applicable) is seen as a strong positive price development. The cane crushing operations in Maharashtra and Uttar Pradesh (which contribute nearly 60 per cent of annual India sugar output) could end in April.

On the weather front, the focus will be on April-May precipitation over Maharashtra. The state receives sporadic rain showers during March-May and the resultant marginal increase in moisture, supports cane planting for the new season. Such moisture is of importance for Maharashtra, this year as it grapples with its worst drought in over 40 years. The priority for water distribution through dams has been assigned for drinking purposes over agriculture. Negligible rainfall in April-May (similar to 2012) could have a negative impact on cane planting and in turn sugar output from Maharashtra. These factors support sugar prices over the next three months. But due to import parity for sugar, steady flow of the commodity from overseas markets could keep a check on domestic price.

Cotton seems to have woken up from a slumber lasting October to January-end. The 29mm Rajkot cotton, which traded in the Rs 16,000-16,200 a bale range from October to January, rallied to Rs 19,000 in March, a gain of 15 per cent from January. This price gain continues to hold and is averaging Rs 18,800 a bale in April. Will this price gain hold or can a correction be expected?

The rally in cotton prices was attributed to the lower arrivals, which dipped from over 250,000 bales per day to below 100,000 bales presently. The lower arrivals are a seasonal phenomenon, as cotton is a kharif crop and arrivals ease into the summer months. But demand pick-up both in terms of exports and mill demand has played a dominating role in the cotton price rally and holds the key to its future price trends. Export registrations have been brisk and there is growing consensus that cotton exports could surpass the eight million bales estimated by the Cotton Advisory Board (CAB) for the 2012-13 season. The CCI has recently registered for one million bales of exports to benefit from the 18 per cent rally in international cotton prices. Domestic mill demand is also expected to remain firm, following good demand from China. Yarn exports in FY2012-13 are estimated at one million metric tonnes compared to 820,000 tonnes a year ago. The low supply and good demand scenario should keep cotton prices supported in the medium term, but just as in sugar, imports of cotton, could play the party spoiler. There were reports of import deals from Africa having been inked in March. This could increase in the coming days on lower availability of domestic cotton. CAB estimates two million bales of cotton imports for the 2012-13 season, higher than the previous season's 1.2 million bales. We expect cotton 29mm Rajkot to trade in the Rs 18,000-Rs 20,000 over the next couple of months.

The author is head-commodity research, Phillip Commodities India Private Limited

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