As per 1st advance estimate of the Ministry of Agriculture, cotton production is likely to grow by 0.7% in FY19- slowest since FY17. This when compounded with strong demand from the external sector is putting upward pressures on cotton prices at this time.

We note that in the domestic market, cotton yarn prices have been growing at around 16% due to strong demand from China, the world’s largest importer of the agro commodity. This has precedence in India’s Textiles (primarily cotton) export growth of 32% to the middle kingdom. The Pink Bollworm outbreak/infestations along with poorer rainfall in farm producing states of India are factors that have lowered supplies further adding to the price pressures. Before accelerating to 16% in November, cotton prices were reeling under poor demand during Q4, FY18 and Q1 FY19.

However, we believe that global cotton price index had decelerated to 0.7% from 19.2% in August, 2018 and this has implications for the Indian cotton market as well. The US imposition of duty on exports to China has resulted in bifurcations through Vietnam – a condition which will reduce demand for Indian cotton in the near term. The scenario also hints at cotton prices coming down in coming months on a global scale because diversification helps in price normalization.

For Indian producers of finished apparel, subsiding price pressures will auger positive news as lower input cost will result in bottom-line improvements.