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MOSL: AGRICULTURE-Cotton, the white gold — a global outlook; Softening of prices likely on horizon

AGRICULTURE: Cotton, the white gold — a global outlook; Softening of prices likely on horizon owing to high production in 2019-20  

 

In this report, we analyze the current scenario and the outlook for the cotton crop across the top-4 producing countries, namely India, China, the US and Brazil, which together contribute 71% to the world's produce. Key highlights:

• India is likely to recover from the subdued 2018-19 cotton season when yield declined by 11%. Production in 2019-20 is estimated to grow ~17% as both yield and acreage rebound.
• The drawdown of reserve stocks in China is expected to be restrained, thereby arresting the decline in closing stocks. This would prevent a situation of excessive supply, consequently negative impact on prices is unlikely.
• Production in the US is expected to grow 22.5% to 22.5m bales in 2019-20 as the abandonment rate dips to 9.3% from 25.3%.
• Brazil is likely to become the second largest cotton exporter in the world on the back of a bumper crop (est. increase in acreage: 33%, est. increase in production: 35%) aided by strong export demand and firm cotton prices.
• High production across the globe would push stocks higher. Eventually, prices are likely to soften as arrivals begin in the later part of the next season (2HFY20).
• Expected increase in India's cotton acreage augurs well for Kaveri Seeds (KSCL) as well as domestic agrochemical and fertilizer consumption. We expect KSCL to clock cotton packet volumes of 6.9m (+13% YoY). The softening of cotton prices would also ease the gross margin pressure on domestic textile companies in 2HFY20.