Commodity Review: Reluctance from buyers stems from acceleration in cotton arrivals

Cotton: Higher prices of the newer cotton crop in the market have already started weighing down profits for textile set-ups in the country- as depicted by the quarterly results of some of the biggest mills. And the same prices are now bogging down demand, which has reportedly crawled to a snail’s pace this week.

Although, the official spot rate lost another Rs 50 over the last seven days- going down to Rs 6550 on Friday, market sources report that heavy buyers are still on the sidelines, waiting for some sort of substantial price drop while ginners sit tight on their stock.

This reluctance from buyers stems from the fact that cotton arrivals have steadily gained pace since the market opened up post Eid and according to traders the numbers are comparable to last year’s arrivals. In comparison, the prices have not let up as rapidly and are trending up by as much as Rs 1,000 per 40 kg from last year. But as the glut season progresses further, our estimates suggest that it would be difficult for ginners to maintain the pressure they are exerting on price levels right now.

Meanwhile on the international front, fiber saw another week of continued slump as harvest pressure weighs down international prices. Additionally, demand from China has been slow as of late, prompting worrying in the market about excessive supplies even as harvest season draws closer in the world’s biggest producing nations.

Investor liquidation has thus brought down cotton futures to the lowest levels in more than 9 months as pressure from global inventories grows. The most-active December cotton contract on ICE Futures this week thus closed down by another 0.8 percent, settling at 77.18 cents/lb.

Rice

Rice quotes from the Asian bloc have remained largely unchanged this week as Thai rice remained the most expensive, with the benchmark 5 percent being quoted for around $405 – $415 per ton, around the same level as rice from Indian origin. Indian 5 percent rice meanwhile is still maintaining about a $40 per ton premium over Pak 5 percent rice which was being quoted around $370 – $380 per ton this week.

The week also saw hope fading away for Thai authorities as no news of a reported deal with China for rice sale emerged. The country is desperate to shift some of its tottering stockpile of government-owned paddy and there were some indications that a G-2-G deal with Beijing could be struck. However, the abundance of good quality alternative sourcing destinations in the market will mean that the deal will unlikely emerge and China will continue to enjoy the fruits of a slumping Asian rice market.

Wheat

As the announcement of the wheat procurement rates for the next season’s harvest draws closer, lobbying forces butt heads as to the direction the prices will take. Talking to BR Research, a source in the Pakistan Flour Mills Association lamented the fact that there were indications that the government may actually increase the procurement prices after being pressured by the farmer lobby.

If it does indeed happen, prices will likely go through the roof by next year and factoring in the milling cost, flour prices may cross all historic barriers, rising to as high as Rs 10/kg. The growers meanwhile are adamant that these price hikes are in line with the growing farm input costs-especially the burden being exerted by higher urea fertiliser costs.

What stance the government will take remains to be seen but sources close to the centre say that the government will very likely lean towards growers and make an announcement of an adequate raise in procurement prices for the next season. Nonetheless, the rates will not likely see a significant jump- especially not the kind they did during FY13, maintain our sources.

Sugar

Sugar prices trended higher once more this week as uncertainty about the start of the crushing season remained fresh in traders’ mind. However, the one good thing that happened to alleviate some of the growers’ concern was the fact that the Sindh government announced its procurement prices for the soon to commence crushing season.

On Thursday, it was announced that the Sindh government would be buying sugarcane at Rs180 per 40-kg for the upcoming season, a respectable rise of Rs8 over the last year’s price of Rs172/ maund. Although, these hikes are not in line with some expectations (there is a rumour of demands as high as Rs 250/40 kg by some participants during stakeholder meetings with the ministry), analysts suggest that they are perfectly in the middle of the road to make up for higher milling costs and that they should very likely keep domestic prices from spiraling or going awry in the upcoming months. The Punjab government in the meantime is yet to announce the procurement rate for the season’s crop but sources are suggesting that prices might be a little higher than those announced by the Sindh department.