Mumbai: Even if cotton production declines by up to 15 percent next season, the adequate domestic stock position is likely to keep the prices stable during cotton year (CY) 2015-16, according to rating agency ICRA.
"Domestic cotton stock position to remain adequate even if the production declines by up to 15 percent in CY 2015-16. Hence domestic prices are expected to remain stable in CY 2015-16," ICRA said in a report here.
The cotton prices, as typical of any other agricultural commodity, are driven by global demand and supply dynamics, it said.
With global cotton demand largely being range-bound (negligible demand growth during last 5 years), the supply remains the key driver of prices.
The massive cotton procurement undertaken by China during the cotton years from 2011-12 to 2013-14 at higher support prices than the international prices resulted in increased dependence of the Chinese mills on cheap imported cotton, thereby resulting in increased imports by China and hence rising prices.
The change in the China's cotton policy to direct subsidy mechanism to farmers from the earlier policy of supporting the prices through reserve purchase program made domestic cotton available to mills in China at market rates and reduced the import dependence.
The release of the cotton stock by China at market rates will further reduce the import requirement of China, which will lead to higher cotton stock levels in both global and Indian markets and further depress the international cotton prices, ICRA pointed out.
Cotton cultivation will remain attractive for the Indian farmers, which will prevent any large shift towards alternate crops and hence mitigate concerns of lower production, the agency said.
"The high support prices for cotton still continue to keep cotton cultivation attractive for the farmers as the profit per quintal for cotton remains high amongst the competing crops," it added.
ICRA said the consistent rise in domestic cotton production without adequate domestic spinning capacities and declining export demand remains a challenge.
