13 March 2009

CCoottttoonn SSeeaassoonnaall RReeppoorrtt

UUppddaattee –– 22000099

Prepared by

Karvy Comtrade Ltd

Hyderabad

COTTON

Cotton report for 2008-09 season was released in the first week of January 2009 with extensive

coverage of supply and demand factors at domestic and global level. The medium term targets

mentioned in the early report have already been achieved (Cotton lint prices forecasted to Rs19000

per candy and Kapas khali forecasted at Rs550-560). This report updates the readers about current

scenario of market and price forecasts till end of cotton season on 30th September 2009.

Overview

Cotton accounts for 40 percent of total global fiber production and most important fiber in the

world. India has emerged as a major player in the world cotton market in recent years after

overtaking US in production to become second largest producer in 2007-08. It has also emerged as

largest exporter in recent years with its surplus output. Cotton covers about 7 percent of total

kharif crop acreage and second to rice in India. Cotton textile is one of largest industry in India and

provides employment to over 15 million people.

Market review

The year 2008 has seen biggest price movement in history of cotton. At NYBOT, cotton futures

traded in the range of 36.7- 92.86 cents per pound with movement of 56.16 cents in 2008. Cotlook

A Index also moved in wide range of 90-51.8 cents per pound. The Cotlook A Index made a high of

82.5 cents, while, ICE cotton futures recorded a 13-year high of 92.86 cents per pound in the month

of March 2008. However, the record prices are not able to sustain for long period and slumped

below 40 cents by November month as US financial crisis surfaced in this period. In domestic

markets, cotton lint prices (Shankar – 6) made all time high of Rs29000-30000 per candy in August

2008, an increase of 54% from a year ago. And also, it fell by 30 percent within short period of 3

months (Sep-Nov 2008) to Rs21000 per candy with sharp decline in exports fueled by global

financial slowdown. In 2009, domestic cotton prices declined further below Rs20000 per candy due

to sharp decline in export demand. However, in the last couple of weeks, prices have seen recovery

due to revival in demand from domestic mills in spite of slow export demand. At global level in

2009, Cotlook A Index fell to 4 years low of 50 cents and ICE cotton futures trading in the range of

41-52 cents per pound.

World cotton

Area under cotton across world has been stagnant for last five decades, however, production has

been increased due to sharp rise in yields. World cotton area is stagnant in small rage of 29.3-35.9

million hectares and registered 0.07 percent growth during 1961-2008. Global cotton output has

increased at annual growth of 1.88 percent in the same period and recorded highest output of 26.56

million tonnes in 2006-07. From 9.8 million tonnes in 1960-61, the world cotton production has

increased to 26 million tonnes in recent years.

Figure 1: World Area and Production of Cotton

Source: USDA. *Estimates for 2008-09 released by USDA in March 11th

Cotton output is almost stagnant around 26 million tonnes in the past couple of years after robust

growth in last few decades. The declining area under cotton in recent years leading fall in output as

most of farmers in developed countries like US are shifting to more profitable crops.

The USDA, in its report released on 11th December, forecasted world cotton output at 23.65 million

tonnes in 2008-09, a decline of 9.8 percent from last year. These production forecasts are lowest in

last five years. The biggest fall in output is seen US, where output has been estimated lower at 2.84

million tonnes in 2008-09 compared to 4.18 million tonnes in last year. The latest output forecast

for 2008-09 are low for most of the cotton growing countries including India.

Table 1: World cotton scenario

MMT: Million metric tonnes

Year

Area

(MM Ha)

Beg. stocks

(MMT)

Production

(MMT)

Imports

(MMT)

Total supply

(MMT)

Exports

(MMT)

2000-01 32.02 11.13 19.40 5.71 36.24 5.72

2001-02 33.73 10.75 21.49 6.38 38.61 6.33

2002-03 30.75 11.91 19.81 6.56 38.27 6.60

2003-04 32.31 10.41 21.06 7.40 38.88 7.24

2004-05 35.71 10.49 26.44 7.28 44.21 7.62

2005-06 34.74 13.19 25.38 9.67 48.23 9.70

2006-07 34.71 13.55 26.56 8.15 48.26 8.08

2007-08 33.09 13.68 26.24 8.33 48.25 8.37

2008-09* 31.03 13.61 23.65 6.33 43.59 6.32

Source: USDA. *Estimates for 2008-09 released by USDA in March 11th

Table 2: Major cotton-producing countries (million metric tonnes)

2004-05 2005-06 2006-07 2007-08 2008-09*

China 6.60 6.18 7.73 8.06 7.80

India 4.14 4.15 4.75 5.36 5.01

United States 5.06 5.20 4.70 4.18 2.84

Pakistan 2.43 2.21 2.16 1.94 1.96

Brazil 1.29 1.02 1.52 1.60 1.26

Uzbekistan 1.13 1.21 1.17 1.20 1.09

Turkey 0.90 0.77 0.83 0.68 0.50

Other 4.90 4.63 3.71 3.24 3.20

Total 26.44 25.38 26.56 26.25 23.66

Source: USDA. *Estimates for 2008-09 released by USDA on March 11th.

Cotton output has increased significantly in developing countries like China, India, Brazil and

Pakistan in this decade. The rapid domestic growth rate of the developing countries and the use of

improved varieties have led to a sharp rise in output in these countries. On the other hand,

production in developed countries like Australia and the US has marginally declined during the

same period.

China is the largest producer of cotton and contributes to one-third of the total global output. India

and the US are the other major producers, together having a share of 33% of the total world

production. These three major countries produce nearly three-fourths of the world output. India

has overtaken the US in terms of output during 2007-08.

Figure 2: Approximate share of cotton-production countries

Note: Percentage share as per March 11th USDA forecasts

The share of total global cotton of India has increased to 21 percent in 2008-09 compared to 18

percent in last year. An increase in area and a rising Bt cotton cultivation in India has led to a sharp

rise in output in the last few years.

In spite of being the largest producer, China has ended up as a net importer due to large domestic

consumption. It consumes about 38% of the total global consumption. Other major consumers are

India and Pakistan. Developing countries use most of the cotton produced given the higher

population and usage of cotton-based materials.

India cotton: Demand-supply dynamics

The cotton-based industry is the largest among agro-industries in India. Cotton is the most

important cash crop in India and it makes a significant contribution to the national economy. Being

a supplier of raw materials for the textile industry, it also plays a vital role in the Indian economy.

Besides contributing to the country’s textile industry growth, it also earns precious foreign

exchange for the country from the export of raw cotton and finished goods. Cottonseed is the

world’s second most-used oilseeds for culinary purposes, and the oil cake residue is a protein-rich

feed for ruminant livestock.

Cotton is the most important raw material for India’s Rs150,000-crore textile industry. It accounts

for nearly 14% of the total national industrial production, 4% of the GDP contribution, and provides

employment to over 15 million people. Indian textile exports were about $21.46 billion in 2007-08.

The textile industry size is expected to touch $115 billion by 2012.

Cotton supply in India

The area under cotton in India has been growing at a slower pace in this decade. The highest area

sown was in 2007-08, when it touched as high as 9.6 million hectares. During last five decades, the

area under cotton has been in the range of 7-9.5 million hectares. Cotton area has grown at 0.27

CAGR since 1960 and 1.83 percent in last 8 years. In the recent years, farmers in India are

preferring cotton crop due to better returns and also irrigation facilities. Technological

improvement in cotton seed is favorable for the farmers. The yield of cotton has almost doubled in

last one decade from just 302 kgs per hectare to 600 kgs per hectare. The highest ever yield has

been recorded in Gujarat in 2008-09 at 775 kgs per hectare.

India produced a record quantity of 315 lakh bales (5.36 million tonnes) in 2007-08. The sharp rise

in output was seen from 2004-05 onwards with the adoption of more Bt cotton. According to trade

sources, farmers have shifted more than 80% of the area to Bt cotton in major producing states of

Gujarat and Maharashtra. The low-yielding and short-staple cotton varieties like Kalyan are on the

verge of extinction.

Figure 3: Indian cotton Area and Production over decades

Source: USDA. *Estimates for 2008-09 released by USDA on March 11th.

Table 3: Cotton Growth (CAGR) in 2000-20008

India World

Area 1.83 0.22

Beginning stocks 9.70 3.44

Production 12.01 3.68

Imports -18.96 3.24

Total Supply 9.77 3.54

Exports 90.09 3.28

consumption 4.60 3.53

Ending stocks 13.29 3.67

Stock to Use % 4.42 0.01

Cotton output has recorded a growth of 3.37 percent since 1960, while in the last 8 years; it grown

at 12.01 percent. The output was below one million tonnes (around 55 lakh bales) and it jumped to

5.5 million tonnes (315 lakh bales) in 2007-08. The largest percentage year on year increase was

seen in 2004-05 with 35.7 percent from previous year. In comparison to world cotton scenario,

India has done well in all sectors including exports, consumption and imports. The cotton output

has been increased by 12.01 percent during 2000-20008 in India, while world market recorded

mere 3.68 percent. Import of cotton by India has fallen by 18.96 percent in last 8 years against

increase of 3.24 percent in world market. India has maintained sufficient stocks (growth of 4.42

percent stock to use), while world cotton market faced shortage at the rate of 0.01 percent.

Table 4: India cotton production scenario

Lakh bales (170 kg per bale)

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09*

Area (million hectares)

8.6 8.7 7.7 7.6 8.8 8.9 9.2 9.4 9.4

Beginning stocks 63 48 66 46 54 112 103 98 95

Production 140 158 136 179 243 244 279 315 295

Imports 20 31 16 10 13 5 6 6 6

Total supply 223 236 217 235 310 361 388 419 395

Exports 1 1 1 9 8 44 58 90 38

Total domestic consumption 173 170 170 173 190 214 232 234 218

Ending stocks 48 66 46 54 112 103 98 95 139

Stock to use (% ) 27.67 38.44 26.85 29.48 56.69 40.02 33.81 29.00 54.00 Source: USDA. *Estimates for 2008-09 released by USDA on March 11th.

According to USDA report released on 11th March 2009, Indian cotton output is forecasted to

decline marginally in 2008-09. Domestic output estimated at 295 lakh bales down by 6.3 percent

from last year. The cotton exports from India is likely to decline from record level of 90 lakh bales

exported in 2007-08 to 38 lakh bales in 2008-09 due to economic slowdown across major

countries. India will have highest carry forward stocks of 139 lakh bales by end of 2008-09 due to

lower domestic consumption and export demand. While, it is likely to maintain the imports at 6

lakh bales in 2008-09.

Cotton demand in India

As per Cotton Advisory Board (CAB), domestic cotton consumption is expected fall to 230 lakh

bales due to domestic economic slowdown. After continuous growth in domestic consumption for

four consecutive years, the demand is likely to decline in 2008-09. The demand for cotton has been

jumped by 38 percent from 2000-01 to 241 lakh bales in 2007-08 as economy performed well in

the last few years. However, the record prices of cotton and weak demand from retail segment and

export market is likely to affect the sale of cotton in coming year.

Table 5: India cotton balance sheet Quantity in lakh bales of 170 kgs each

Particulars 2008-09 2007-08

SUPPLY

Opening stock 43.00 47.50

Crop size 290.00 315.00

Imports 7.00 6.50

TOTAL AVAILABILITY 340.00 369.00

DEMAND

Mill Consumption 195.00 203.00

Small-Mill consumption 20.00 23.00

Non-Mill Consumption 15.00 15.00

TOTAL CONSUMPTION 230.00 241.00

Exports 50.00 85.00

TOTAL DISAPPEARANCE 280.00 326.00

CARRY FORWARD 60.00 43.00 Source: Cotton Corporation of India (drawn by Cotton Advisory Board in its meeting on 13-02-2009)

State-wise production of cotton

Gujarat and Maharashtra are major producers of cotton in India and contribute nearly 60% of the

total output. Hot weather and black soil in these states support better growth of cotton. Most of the

cotton is cultivated under rain-fed conditions in these states. Andhra Pradesh and Punjab are the

other major growing states. Cotton is cultivated under irrigated conditions in Andhra Pradesh,

Punjab and Rajasthan. The area under cotton significantly increased in major producing states like

Gujarat and Maharashtra in 2007-08, but declined in 2008-09. The sowing was delayed in kharif

2008 due to insufficient rains and in the early stages of crop, it affected the growth. Highest ever

yield has been recorded in Gujarat at 774 kgs per hectare, which is well above the national average

of 560 kg per hectare. Most of the states have seen falling area under cotton in 2008-09 except

Andhra Pradesh. As per Cotton Advisory Board (CAB), Indian cotton output is expected to decline to

290 lakh bales in 2008-09 down by 8 percent from 2007-08.

In the current cotton year 2008-09, the output in Gujarat is estimated at 90 lakh bales against 112

lakh bales in 2007-08. Maharashtra is likely to produce 62 lakh bales, the same as last year, while

the output in Andhra Pradesh is estimated at 53 lakh bales.

Table 6: Cotton state-wise production Area in lakh hectare/Production in lakh bales/Yield kgs per hectare

2008-09* 2007-08

State Area Production Yield Area Production Yield

Punjab 5.37 17.50 554 6.04 22.00 619

Haryana 4.55 14.00 523 4.83 16.00 563

Rajasthan 2.23 7.50 572 3.39 9.00 451

North Total 12.15 39.00 546 14.26 47.00 560

Gujarat 24.17 90.00 633 24.22 112.00 786

Maharashtra 31.33 62.00 336 31.94 62.00 330

Madhya Pradesh

6.55 18.00 467 6.30 21.00 567

Andhra Pradesh

13.45 53.00 670 11.38 46.00 687

Karnataka 3.90 9.00 392 4.02 8.00 338

Tamil Nadu 1.20 5.00 708 1.19 5.00 714

Others 0.98 2.00 347 1.08 2.00 315

Total 278.00 303.00

Loose Lint 12.00 12.00

Grand Total 93.73 290.00 526 94.39 315.00 567 Source: Cotton Corporation of India (drawn by Cotton Advisory Board in its meeting on 13-02-2009)

Figure 4: States’ share of cotton production

Cotton price analysis

Seasonality Index in domestic cotton lint prices

The seasonality Index constructed for cotton lint prices from 1996-97 to 2007-08, indicates smooth

movement of prices. As every commodity prices trade lower during the arrivals, the cotton prices

have also traded weak in peak arrival season. In the domestic markets, the arrivals start from

October and peak in Nov – Jan period. The seasonality index remained below 100 till April month

and moved up to 105.74 in August, the lean arrival season.

Figure 5: seasonality in cotton prices

Domestic cotton lint price movement

Cotton prices were quite volatile on year on year basis in last one decade. It has averaged above Rs

23000 per candy only twice during this period. Highest ever yearly average price recorded in 2003-

04 along with record global cotton prices, when NYBOT futures made high of 85 cents per pound.

Figure 6: Yearly average prices of cotton lint and percentage change (announced by Cotton

Association of India)

Source: Cotton Corporation of India

The biggest annual rise in prices was seen in 2002-03 with an increase of 24.80 percent, while

biggest crash was in 2004-05 by 28.19 percent. In 2007-08, prices rose by 21.61 percent from

2006-07 and made second high of Rs23216 per candy. Although, domestic output was at record

high of 315 lakh bales domestic prices rose sharply in 2007-08 due to strong exports of 90 lakh

bales and firm global cotton prices (NYBOT made high of 92.86 cents per pound).

Daily cotton lint prices in recent years (2005-08)

The cotton lint prices provided by MCX for long staple shown in the Figure 7, indicate

unprecedented rally in last three years. The cotton prices made all time high of Rs29000 per candy

in September 2008 as against Rs16800 in October 2005. The biggest rally was seen in cotton year

2007-08 with prices gaining by Rs9000 per candy with in the season. The prices were around

Rs20000 per candy in the beginning of cotton season in 2007 and rose to Rs29000 per candy by

first week of September. The rally in cotton prices was due to strong export growth in 2007-08,

which rose to 90 lakh bales compared to 58 lakh bales. The domestic demand also increased to 241

lakh bales against 232 lakh bales in 2006-07.

However, prices fell sharply within short period of one month to Rs21500 per candy from 2008

high of Rs29000 per candy. The slowdown in exports with financial crisis in US and other major

countries and higher crop estimates for this season led to sharp fall in prices. The global cotton

prices also plummeted to 18 months low of 40 cents pound.

Figure 7: Cotton Lint prices (MCX)

Source: Bloomberg

Minimum Support Price (MSP)

The minimum support price (MSP) is the support price fixed / announced by the central

government every year before the start of the season. The MSP change (hike) for raw cotton in

2008-09 season is the biggest-ever in the history of the support price regime, which started in

1965. The medium-staple varieties, such as F-414/H-777/J34, have seen a whopping hike of

38.89%, and fixed at Rs2500 per quintal. Meanwhile, the MSP for long-term staple cotton variety, H-

4, has been increased by 47.78% from last year.

Table 7: MSP for cotton announced by the central government

F-414/H-

777/J34 % Change H-4 % Change

2003-04 1,725 1,925

2004-05 1,760 2.03 1,960 1.82

2005-06 1,760 0.00 1,980 1.02

2006-07 1,770 0.57 1,990 0.51

2007-08 1,800 1.69 2,030 2.01

2008-09 2,500 38.89 3,000 47.78

The MSP for the popular variety, Shankar – 6, is fixed at Rs2850 per quintal compared to Rs2055 in

2007-08. The major reasons for the unprecedented rise in MSP for the 2008-09 season is the

increasing cost of inputs and political factors. The government procurement agency for cotton, the

Cotton Corporation of India (CCI), announced last week that it is likely to increase the procurement

quantity in the 2008-09 cotton year, and it may touch 5-10 lakh bales against the 2.5 lakh bales it

procured last year.

Global cotton price movement

Global cotton prices are represented by both ICE cotton (NYBOT) futures and Cotlook A Index. ICE

cotton futures was quite volatile in 2008 as prices made third highest ever of 92.86 cent per pound

in March 2008 and fell to 36 cents levels in November month. The Cotton futures at ICE made all

time high of 116.88 cents in April 1995 though production was normal at 18 million tonnes. Cotlook

A index, which started in 1993 made all time high of 119.4 cents in the same time. Apart from this

all time high, the cotton prices moved up sharply in 1991 to 91.96 cents and third highest ever

prices was made in 2008. Since, data available at ICE (from April 1986), cotton futures fell to 28.52

cents per pound in October 2001.

MSP and its impact on cotton prices

For the first time ever, the government increased the MSP for cotton by as much as 40-48% for

2008-09. The CACP (Commission on Agriculture Cost and Prices) is a nodal agency that

recommends the MSP for agriculture commodities to the government. For instance, the MSP for the

popular variety, Shankar-6, has been fixed at Rs2,850 per quintal against last year MSP of Rs2050

per quintal. The cotton sector, including growers, ginners and the textile industry, faced good times

in the 2007-08 season, as every stakeholder achieved better returns due to higher cotton prices and

strong export growth. India produced a record quantity of 315 lakh bales and exported a record

quantity of 85 lakh bales. The country took advantage of lower US cotton production/exports and

strong demand from China last year. However, the scenario changed suddenly in 2008-09 as the

global economic crisis led to a sharp fall in demand for commodities, including cotton. Even as

prices of cotton fell to its six-year low of 37 cents per pound at ICE, the global demand for cotton

failed to pick up in the 2008-09 season. As per market sources, India has exported about 12-15 lakh

bales since beginning of season in October to till end of February 2009 against 60 lakh bales in

same period of 2007-08 season. Other global suppliers like US have got benefitted due to higher

Indian prices in world cotton market.

Cotton procurement operations

With higher MSP and weak demand for cotton from export market and domestic mills, Government

procurement agencies have purchased record produce in 2008-09 cotton season. The farmers

preferred to sell to procurement agencies like CCI and Nafed rather than private buyers due to

higher MSP and weak market prices. As per reports, till end of February month, these two agencies

have bought 100-110 lakh bales, which is about 38 percent of total production estimates and 45

percent of total arrivals. Cotton Corporation of India (CCI) is largest purchaser of cotton, which had

bought 82 lakh bales till end of February is likely to make losses worth of Rs2500 crores in its

operations. These procurement agencies have offered discounts on its sale price of cotton to offload

their produce and have sold about 40 lakh bales till recently.

As per CCI data, till 7th March 2009, total arrivals stood at 238 lakh bales against 252.7 lakh bales in

same period of last year. Average daily raw kapas arrivals have fallen to 1.0-1.2 lakh bales against

near 2 lakh bales in mid-February.

Kapas Khali (Cotton Seed Oil Cake)

Oil meals are one of the important ingredients in cattle feed across the globe. They supplement the

required protein to livestock. Different oil meals available across the globe are soy meal, rapeseed

meal, groundnut meal, cotton seed oil cake, sunflower meal, copra meal and palm kernel meal. Soy

meal has the lion’s in total oil meals production. Among the oil meals, cotton seed oil cake or

kapaskhali is mainly used as cattle feed where as others are used as poultry feed.

Most farm grains and roughages are deficient in the protein necessary for animal maintenance,

growth and development. Cottonseed meal, a leading protein supplement, provides the necessary

protein to overcome this deficiency and also conserves available supplies of grain and roughages. It

furnishes three to six times the protein of most grains and 10 to 20 times that of the lower quality

roughages. When used only in the amount necessary to balance a ration, one pound of meal will

save two and a half to three pounds of grain. In addition to its high protein content and high energy

value, cottonseed meal is higher in phosphorous than any of the other vegetable proteins.

Cottonseed meal may be used to some extent in the rations of all classes of livestock. It is sufficient

as a sole source of protein for mature ruminants such as beef cattle and sheep and can provide

much of the protein for dairy cows. Since it is a natural protein source its nitrogen is effectively

utilized and there is little danger of excess ammonia being produced in the rumen or stomach of

these cud-chewing animals as sometimes occurs when feeding synthetic protein materials. High

quality cottonseed meal, used correctly as an ingredient of properly formulated swine and poultry

rations, improves economy and efficiency.

Processing of cotton seed

Cotton seed

Cotton oil seed cake (82-85%) Oil (12-14%) Wastage (3%)

Milling and trade

Milling of cotton seed starts as soon as cotton season begins in September – October. This crushing

season continues till June of consecutive year. Crushing of cotton seed ends as soon as monsoon

starts. Cotton seed contains 12-14% of oil and 82-85% of cake. Oil is mainly used for edible

purpose. Cotton seed oil cake is mainly used for feeding cattle in India. Farmers prefer cotton seed

cake compare to other cakes like ground nut cake. Cotton seed cake is less hot than other oil cakes.

India consumes most of produce domestically and major consuming states are Gujarat, Rajasthan

and Maharastra.

Cotton Seed Oil Cake or Kapas Khali, a bi-product of cotton or kapas, is the remnants of oil extract. It

is obtained from crushing cotton seed separated during the process of ginning. The cotton-seed

consists of two parts: the hull, from which the staple cotton lint and linters arise, and the kernel,

from which the oil and meal are obtained. The nutritive value of cottonseed products depends on

proportions of husks and lint. One ton of seed yields about 200 kg of oil, 500 kg of cottonseed meal

and 300 kg of hulls.

Although cotton has been grown for its fiber for several thousand years, the use of cottonseed on a

commercial scale is of relatively recent origin. In ancient times, it is reported that the Hindus and

the Chinese developed crude methods for obtaining oil from cottonseed, using the principle of the

mortar and pestle. They used the oil in lamps and fed the remainder of the pressed seed to cattle.

For many centuries, however, the use of cottonseed did not develop much beyond that crude stage

and was confined to local areas.

World cotton oil seed cake supply

World cotton oil seed cake output has increased gradually over a period of time. Output of cotton oil

seed cake has made all time high of 15.87 million tonnes in 2007-08, mainly due to record output of

cotton in India. In the past five years, the production sustained above 15 million tonnes except in

2005-06 as cotton output has been increased in recent years. biggest contributors to rise in output

of this cake is sharp increase in cotton output in India, which has seen record output of 315 lakh

bales in 2007-08. The global trade of cake is limited as largest producers like China, India and

Pakistan consume most of the produce domestically with large cattle population. In recent years,

world export of cake remained less than 0.5 lakh tonnes. According to recent estimates given by

USDA, the global cotton oil seed cake production expected to decline marginally to 14.98 million

tonnes in 2008-09 against 15.87 million tonnes in 2007-08. The ending stocks are forecasted to fall

to five years low of 1.32 lakh tonnes due to lower output seed cake.

Table 8: World cotton oil seed cake supply

Quantity in 1000 MT

Crush(MMT) Beginning stocks (Lakh Tonnes)

Production(MMT) Exports (Lakh Tonnes)

Ending stocks(Lakh Tonnes)

2000-01 24.55 0.87 11.26 0.58 0.89

2001-02 26.30 0.89 11.93 0.60 1.07

2002-03 25.45 1.07 11.48 0.39 0.71

2003-04 26.98 0.71 12.27 0.44 0.94

2004-05 33.24 0.94 15.10 0.42 2.02

2005-06 32.07 2.02 14.56 0.41 2.54

2006-07 33.70 2.54 15.32 0.36 2.09

2007-08 34.86 2.09 15.87 0.39 1.37

2008-09 32.99 1.37 14.98 0.37 1.32

Source: USDA

Figure 8: Share of major kapas khali producers

Share of Major Kapaskhali Producers

China

27%

India

20%Pakistan

13%

Others

14%

Mexico

1%

Australia

1%

Syria

1%

Uzbekistan

6%

United States

8%

Brazil

5%

Turkey

4%

China is largest producer of cotton oil seed, since it is largest producer of raw cotton. India is

second largest producer of cotton oil seed cake and constitutes 20% of total global output.

Although, US is second major producer of cotton, it is placed at fourth in production of cotton oil

seed cake.

India cotton oil cake scenario

India produces about 30 million tonnes of oil seeds and cotton seed is largest among all the oil

seeds. Cotton seed constitutes 30% of total oil seed output in India followed by soy bean and

rapeseed. Cotton seed output has increased in the last few years with increased area and

production of cotton. Crushing of cotton seed has almost doubled in the last ten years. Cotton seed

crushing was 3.7 million tonnes in 2000-01, which jumped to 7.6 million tonnes in 2007-08, but it is

expected to decline to 7.20 million tonnes in 2008-09. The major reason for lower production

forecasts is fall in cotton output by 8 percent in 2008-09 in India.

Table 9: Production of cotton seed oil cake in India

Crush (MMT) Production (MMT) Exports(10000 Tonnes)

Domestic consumption (MMT)

2000-01 3.71 1.74 1 1.74

2001-02 3.84 1.81 7 1.80

2002-03 3.41 1.60 2 1.60

2003-04 4.33 2.03 1 2.03

2004-05 5.90 2.77 1 2.77

2005-06 5.97 2.80 0 2.80

2006-07 6.58 3.09 0 3.09

2007-08 7.60 3.57 0 3.57

2008-09 7.20 3.38 0 3.38

Figure 9: Cocud spot prices (NCDEX Akola)

Unit Rs per 50 kgs

The year 2008, was bullish year for kapas khali prices, where it made all time high of Rs532 per 50

kgs at Akola. The spot prices were below Rs400 in January 2008 and rallied to this high in the July

2008 on strong demand in domestic markets. the firm cotton and edible oils prices in the first half

of the 2008 fueled the rally in kapas khali prices. However, within few months it fell to Rs411 (Oct

08) levels on unsustaining demand at higher levels. The new crop produce, which commenced from

November beginned with higher price of Rs520 and thereafter declined to Rs440 in December

month. prior to bullish trend in kapas khali, the prices were trading in broad range of Rs250-450

per 50 kgs in the last 3-4 years. in 2009, kapas khali prices have once again turned bullish very

early even before cotton arrivals ended due to lower cotton output. Demand for kapas khali remain

strong in summer season and extend till August month with crushing ends in March.

Price outlook for domestic cotton and kapas khali for 2008-09 season

Current prices

Cotton lint prices are quoting Rs20500 per candy (Shankar-6) across major markets of Gujarat and

kapas khali spot prices are quoting at Rs1030 per quintal at Akola. Prices had fallen from Rs23000

per candy in January as below as Rs20000 per candy in February due to weak export demand. As

mentioned in the early report, lint prices have fallen to Rs20000 per candy in February. With

arrivals falling in spot markets and revival of export demand at these lower prices, we expect prices

to move up in coming months.

Cotton (Kapas)

• Long term (till end of cotton season by September 2009): Rs24000 per candy (Shankar – 6)

• NCDEX and MCX kapas (April): Rs510-520 per 20 kgs (currently NCDEX Kapas futures

trading at Rs470 levels)

Kapas khali

• Long term (till end of cotton season by September 2009): Rs1200-1250 per quintal at Akola

• NCDEX and MCX: Rs600-625 per 50 kgs (Currently NCDEX May-June trading at Rs550-560)

Supportive factors for rise in cotton and kapas khali prices

Lean arrivals: Average daily arrivals of raw kapas have fallen to 1 lakh bales. Out of total

production estimated (290 lakh bales), 85 percent of produce has been arrived in spot market. Lean

arrival phase continue till next crop in October.

Incentives for exports: Government has announced series of sops to the export sector including

cotton. It announced 5 percent duty incentive on raw cotton exports by including the fiber

commodity in the Vishesh Krishi and Gram Udyog Yojana. This incentive scheme applies exports

from April 1 2008 to June 30 2009. Government has also announced extension of interest rate

subvention till September 2009.

Global shortage of cotton: World cotton output is forecasted to fall by 9.8 percent and Indian

output is estimated to decline by 8 percent in 2008-09.

Weakening rupee: The rupee has depreciated by 33 percent since February 2008 and has made all

time low of 52.13 against USD. Depreciation of Rupee is beneficial for the cotton and its products

exporters. For every Rupee of depreciation, return on cotton exports gives increment of

approximately Rs4000 per candy at current prices.

Summer demand: Crushing of cotton seed almost ends in March with end of raw kapas arrivals in

market. Demand for kapas khali increases during summer season with lower availability of green

grass.

Glossary

One candy = 355.62 kgs (apprx 356 kgs)

One bale = 170 kgs

100 bales = 48 candy

One candy = 2.09 bales

One cotton pound = 0.45 kgs

Indian cotton season = 1st October – end of September

US cotton season = 1st August – end of July

Disclaimer

The report contains the opinions of the author that are not to be construed as investment advice. The author, directors and other employees of Karvy, and its affiliates, cannot be held responsible for the accuracy of the information presented herein or for the results of the positions taken based on the opinions expressed above. The above-mentioned opinions are based on the information which is believed to be accurate and no assurance can be given for the accuracy of this information. There is risk of loss in trading in derivatives. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for any losses in trading. Commodity derivatives trading involve substantial risk. The valuation of the underlying may fluctuate, and as a result, clients may lose their entire original investment. In no event should the content of this research report be construed as an express or an implied promise, guarantee or implication by, or from, Karvy Comtrade that you will profit or that losses can, or will be, limited in any manner whatsoever. Past results are no indication of future performance. The information provided in this report is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. We do not offer any sort of portfolio advisory, portfolio management, or investment advisory services. The reports are only for information purposes and not to be construed as investment advice. For a detailed disclaimer please go to following URLs: http://www.karvycomtrade.com/disclaimer.asp http://www.karvycomtrade.com/riskDisclaimer.asp