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Weak beginning of cotton sowing an aberration; albeit cotton crop likely to moderate in CY2019 JUNE 2018

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Cotton kharif sowing: Slower-than-usual pace till date amid water availability issues As per the latest kharif sowing estimates released by the Ministry of Agriculture, area coverage under cotton is lower by ~14% this year (till May end), vis-à-vis the level normally witnessed till this time of the year, and ~18% below the level reported last year. Besides being too early to derive conclusions from the sowing pattern, lower acreage appears to be an aberration caused by water availability-related issues in some of the states where sowing has commenced. Kharif cotton sowing in India: Kharif cotton sowing in India is typically spread over the months of April-July and varies across states (refer Exhibit I), depending on weather conditions and water availability. Early sowing during the months of April-May typically happens in the Northern Belt comprising the states of Punjab, Haryana and Rajasthan that together account for ~12% of the cotton acreage and ~14% of the domestic cotton output. In comparison, sowing in the Central, Western and Southern Belts predominantly happens between June and July. Sowing trends witnessed this year: A major part of cotton sowing in the Northern Belt typically happens by May end every year. However, sowing in this belt commenced on a weak note this year, with ~64% of the area sown till May 2018 vis-à-vis ~75% normally sown. The pick-up in sowing pace happened in recent weeks only and was particularly visible in Rajasthan, where ~44% of the area covered under cotton was sown in the last week of May 2018. Thus, while only ~6% of the cotton area had been sown in Rajasthan till May 24, 2018, the coverage increased to ~50% by the end of May 2018. The recent spurt in cotton sowing in Rajasthan (62% YoY increase till May 2018) is being driven by the increased preference of farmers for cotton vis-à-vis the prime alternate crop of guar gum, amid favourable cotton prices and expectations of normal monsoons. In comparison, Punjab and Haryana have seen ~26% and ~35% lower sowing vis-à-vis last year, respectively, with only ~84% and ~67% of the area normally sown till this time of the year, getting sown till May 2018. The tepid beginning of the sowing can be largely attributed to water availability issues in these states. As per Central Water Commission, the total water available in live storage of 91 reservoirs in the country this year is ~18% of the total live storage capacity of these reservoirs (vis-à-vis ~20% last year) and 91% of the 10-year average storage. Besides low water levels in reservoirs, erratic water supply in the Sirhind Canal - which caters to Punjab’s water requirements - and relining work undertaken in the Indira Gandhi Feeder (IGF) canal, which passes through Punjab and Haryana and feeds various districts of Rajasthan for agriculture, affected water supply and resulted in a delay in the commencement of sowing. The relining work, which commenced on March 29, 2018 and was scheduled to be completed by April 25, 2018, got stretched till mid-May 2018. Further, the water supply from the IGF canal remained patchy even after commissioning during the month of May, as the release of molasses by a sugar mill in Punjab contaminated the water, requiring the authorities to regulate the release of water. Exhibit 1: State-wise cotton-sowing patterns and status this year Total State's share State's share in cotton Area in lakh hectares in domestic domestic cotton sown sown area output area^ Haryana 6.0 5% 6% Punjab 3.9 3% 3% Rajasthan 4.5 4% 5% Northern Belt 14.4 12% 14% Gujarat 25.8 22% 27% Maharashtra 41.1 34% 26% Madhya Pradesh 5.7 5% 6% Odisha 1.3 1% 1% Central/ Western Belt 73.8 62% 60% Telangana 16.8 14% 14% Andhra Pradesh 6.5 5% 5% Karnataka 6.4 5% 5% Tamil Nadu 1.5 1% 1% Southern Belt 31.1 26% 25% Others 0.4 0% 1% Total 119.8 100% 100% Source: Ministry of Agriculture, ICRA research

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Area sown vis-à-vis area normally sown* Till Till 24-May-18 31-May-18 -11% -16% -32% -33% -77% +32% -27% -14%

Area sown as % of state’s total sown area Till Till 24-May-18 31-May-18 75% 75% 63% 63% 6% 50% 50% 64%

Area sown vis-à-vis May 2017 -26% -35% +62% -18%

Typical kharif sowing time April

May

June

July

August

NA (Sowing yet to commence) -

-

-

-

-

NA (Sowing yet to commence) +9% +150% +12% +98% -24%

-9% +60% -7% -26% -14%

^ Area under cultivation for cotton, based on historical trend

6% 1% 1% 42% 7%

8% 2% 2% 40% 8%

-11% -50% -14% -40% -18%

* Area normally sown till corresponding week in the past four years

#

# Happens till mid-Oct

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Outlook for cotton output: Regional pest attacks in CY2018 to deter cotton sowing in key belts and constrain output in CY2019 Exhibit 2: States/regions likely to witness lower sowing in CY2019 Area sown in lakh hectares For CY2018E* For CY2019P* Northern Belt 15.4 15.4 Gujarat 26.2 27.7 Maharashtra 42.0 38.0 Central/ Western Belt 75.6 73.2 Telangana 18.2 14.1 Andhra Pradesh 5.4 4.7 Karnataka 5.7 5.1 Southern Belt 30.8 25.4

Chart 1: Trend in sown area, yield

Total

122.4

114.5

% change 6% -9% -3% -23% -13% -10% -18% -6%

* Cotton sowing for CY2018 (Oct 2017-Sep 2018) would have happened during Apr-Aug 2017 (i.e. during CY2017; cotton sowing for CY2019 (Oct 2018–Sep 2019) is currently underway (i.e. during CY2018)

Source: Cotton Corporation of India (CCI), Cotton Advisory Board (CAB), Ministry of Agriculture

With water availability issues starting to get addressed, ICRA expects the pace of cotton sowing in the Northern Belt to pick up further in the coming weeks, in line with trends witnessed in recent weeks. Although there is an increasing possibility of some shift in favor of more profitable paddy crop vis-à-vis cotton in Punjab and Haryana considering expectations of a normal monsoon as well as risks emanating from pest attacks in some regions given the delayed sowing, cotton acreage in the Northern Belt is expected to remain at normal levels. Nevertheless, cotton sowing in some key regions in the Western and Southern belts is expected to be lower for Cotton Year (CY) 2019 (refers to year ending September 2019) visà-vis sowing for CY2018 (refer Exhibit 2), as regional pest attacks caused sizeable losses to cotton farmers in these regions during CY2018. During CY2018, India experienced pink bollworm attacks across key cotton-producing regions of Maharashtra, Gujarat, Madhya Pradesh, Telangana and Karnataka. These states together account for ~80% of the cotton acreage in the country and more than three-fourth of the domestic cotton output. Pest attacks resulted in the crop output for CY2018 being ~7-8% lower at ~36 million bales, visà-vis ~38.8 million bales, which could have been achieved had the yield been closer to ~541 kg per hectare, a level achieved during CY2017. Accordingly, ICRA estimates a ~7-8% decline in domestic cotton acreage to ~114 lakh hectares for CY2019 vis-à-vis 122 lakh hectares estimated for CY2018. The decline is likely to be driven by the states of Maharashtra, Telangana, Andhra Pradesh and Karnataka, which are likely to report a 10-25% decline in cotton acreage (refer Exhibit 2), with farmers opting for alternate crops such as soybean. Amid lower cotton acreage, expectations of a normal monsoon augur well for cotton yields, which should see some uptick in CY2019 vis-à-vis CY2018 (refer Chart 1). Nevertheless, lower acreage is expected to moderate the domestic cotton crop output to ~35 million bales in CY2019 after a reasonably good CY2018, wherein cotton production recovered to ~36 million bales, after remaining muted for two consecutive years in CY2016 and CY2017 (refer Exhibit 3). Exhibit 3: Indian cotton balance sheet Estimate as in (million bales of 170 kg each) Opening Stock Production Imports Consumption Exports Closing Stock Stock to Use Ratio

CY2013 Actual 4.0 37.0 1.5 28.3 10.1 4.0 14%

CY2014 Actual 4.0 39.8 1.2 30.0 11.7 3.3 11%

CY2015 Actual 3.3 38.6 1.4 30.9 5.8 6.6 21%

CY2016 Actual 6.6 33.2 2.3 31.5 6.9 3.6 12%

CY2017 Provisional 3.6 34.5 3.1 30.6 5.9 4.8 16%

CY2018E Estimate % Increase 4.8 +31% 36.1 +5% 1.5 -52% 31.5 +3% 5.6 -5% 5.2 +10% 17%

CY2019E Early Estimate % Increase 5.2 +10% 35.2 -3% 1.5 32.2 +2% 5.6 4.1 -22% 13%

Source: ICRA research, Textile Commissioner, Cotton Association of India (CAI), CCI; Note: Cotton Year (CY) here refers to the twelve-month period of October-September

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Outlook for cotton prices: Prices expected to remain firm Although the cotton crop output in CY2019 will continue to be comfortably above the lows witnessed during CY2016 and CY2017, there are multiple factors at play which are likely to keep cotton prices firm in the current trading range, which is ~10% above the prices prevailing in the beginning of 2018. Expectations of a higher minimum support price: A 6% increase in the minimum support price (MSP) in CY2018 and a 5% additional bonus declared in the state of Gujarat, prior to the state elections in December 2017, resulted in an increase in the domestic cotton price floor to ~Rs. 105/kg from ~Rs. 92-95/kg till about 1.5-2 years back. Incrementally, in the Union Budget 2018-19, the Government announced a policy to align the MSP of crops to 1.5 times of the cost of production. As per ICRA’s estimates, this is likely to push up the cotton price floor further to ~Rs. 115-120/kg. This, together with expectations of a lower crop, has already driven cotton’s market price to over Rs. 120/kg in the months of April and May 2018. Improvement expected in domestic consumption: The domestic demand growth from the downstream segments has started showing signs of restoration post the twin-transitory pressures of demonetisation and the Goods and Services Tax (GST). This is expected to drive demand for cotton, putting an upward pressure on cotton prices. Cotton deficit (production less consumption) at global level to result in correction in cotton stocks during CY2019: Global cotton output in CY2019 is expected to fall short of consumption, which will result in a decline in cotton stocks to a seven-year low next year. Correction in stocks, in turn, is expected to keep the cotton prices firm over the next 12-18 months.

ICRA’s view: Cotton scenario likely to be a mixed bag for domestic spinners

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With likelihood of a decline in cotton output in CY2019 and firmness in cotton prices over the next 12-18 months, ICRA expects mixed trends in the performance of spinning companies over the next few quarters. Financially-flexible companies that have managed to build up cotton stocks at lower-than-prevailing market prices are expected to benefit from gains on lower-cost inventory during H1 FY2019. Although there are associated carrying costs (finance costs for holding inventory) as well, gains from the same are expected to be more-than-adequate to offset the increase in costs. In comparison, companies that missed the stocking opportunity during a short window in Q3 FY2018, when cotton prices had temporarily dipped to the floor price, may face profitability pressures during H1 FY2019. Further, with cotton prices remaining firm, working capital requirements and, hence, interest costs of cotton-based spinners are expected to remain high during FY2019.

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Cotton outlook june 2018  
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