CAI – Cottton Article – March 2022

Cotton Scenario 2021-2022: White Bull

Biggest Bull market often originates from utmost pessimism, says an old market proverb. We have seen it materializing in a holistic way. The bull market we have seen in 2021 amid coattail of various triggers ranging from supply demand imbalances or powered by external and non market influences like economic and fiscal policy of central banks and respective govt regimes. Back Logue of demand, supply disruptions in key export hubs, relocations of global supply chains amid US-China tech-Trade rivalry and massive spending power- creation of never ending like money printing by US central bank and hefty stimulus check- Direct cash support to the USA consumer, and lastly- a reflation trade with supply shock given a reason for perfect storm in the market. Season started with utmost fear and frailty amid massive opening stock with cotton corporation of India, economic disruption and prolong lockdown and restrictions during corona first wave which had devastating impact of local consumption and exports, resulting in Huge cotton inventory with govt nodal agencies- CCI and Mahafed.   

Supply creates its own demand- J B Say

I recall this famous law of economics which  I studied in senior school class 12^th, almost 37 yrs ago. Its so simple. It says supply it self is a trigger to generate demand- Our veterans in cotton trade says Maal na naseeb mota!..When season opened with a 110 lakh plus bales and  cotton bale prices were just stabilizing around 34000-35000 after dipping as low as 32000 in March 2020. Sentiment was too bearish and scenario was of fool of doom. Cotton corporation of India- CCI – which was reeling under supply glut and cotton sharks were almost sure that CCI will  be force to liquidate goods as a distress seller, However there was change of guard at the CCI juggernaut and probably nobody knows that leadership change at upper echelon of this institution was going to create history by transformation, adoption of modern auction models, electronic platform and Business practices like a seasoned merchant and the process will be beneficial for whole ecosystem. Agency was carrying almost 120 lakh bales during March-jul 2020.  Cotton futures in ICE were in free fall and traded as low as 48 cents. Domestic MCX cotton traded as low as 14400 in March 2020. 

 Corona first wave induced prolong lockdown and entire economy was paralyzed. It was devastating in terms of economics. Second wave was shorter and lockdown were more discretionary- but it was a health amid all this doomsday talks, CCI took a bold bet. It offered to sale cotton inventory in bulk with hefty discount. Initially sale was to be commenced with Rs 35000-36000 with various attractive conditions. For buyers, it was simple- More you lift, better price you get. It helped CCI to offload sizable chunk of cotton and reduce liquidity strain. For mills and spinners, it helpd them to attain supply side security at affordable prices. 

There are decades when nothing happen and there are weeks, when decades happen.

 When season started in October 2020, CCI was having almost 40% of total cotton inventory. Having access to govt money as part of price stabilization program and capability to control market with flow of goods and also price point perspective- CCI could manage to supply cotton to spinners, mills, exporters. Initially it ultra relaxed term, but gradually adopting professional practices which can be of win win situation for all. If we go into flashback of last 18 month, we are seeing its was a banner year- super duper year for spinners. Spinning units run smoothly and with very healthy and wealthy margins. Those stake holders who ae proactive in inventory mgmt grabbed the opportunity and earned a windfall. ( Corporate results of some leading textile players tells the story). While CCI played major role efficient disposal it’s inventory and maintain the flow in system which is beneficial for all stakeholders, some stake holders who failed to adopt impending change leadership change) and were too much focus on supply side only fail to build up required inventory cover and compel to cover cotton at much higher prices. CCI was not only trigger behind the rally- there were many culprits, main culprit was supply chain disruptions due to factory closure, soaring shipping freights, and markets overreaction to Corona 2^nd pick. Understanding corona 1^st wave ( pre-vaccine) and corona 2^nd wave ( post vaccination-delta etc) is crux of story. Lets have a look on tale of 2 corona wave.

Tale of two covid peaks- March 2020 and March 2021

If we inspect respective cotton charts to gauge the impact of covid1st wave and covid Delta 1^st wave, we can find panic during 1^st wave more intense in Indian market due to prolong lockdown and severe economic devastation. Cotton prices fell sharply lower from 24400 to 14960 during 1^st wave.  Similarly ICE cotton prices fell from 70.50 to 54 (Impact here is less severe). Markets recovered onwards new season in October 2021 and emergence of Delta variant during February 2021, prompted 2^nd corona panic during March 2021. There is stark difference between these 2 panics. Covid 1 panic was more severe, while covid 2 panic was less severe and very brief- shallow sell off as rapid vaccinations in US, UK, China kept infection in chack. Market reaction to 2^nd panic of delta variant was muted, as major countries did not opted lockdown and vaccinations help contain spread and hospitalizations in developed world. Currently covid Delta wave has become traumatic in south east asia and some part of Africa, however vaccinations may limit the spread.

Reflation trade, Revenge Buying and bull market in everything

Covid induced lockdown is now unwinding and economy is in unlockdown mode, albeit with an uneven speed. Economy is much more resilient compare to covid 1^st wave. Continuous monitory and fiscal support has given a turbo boost to investment cycle, consumption cycle and manufacturing. Due to cohesive- concerted market intervention to lift up economy- a virtues cycle born. Stock market  worldwide scaled a new high which had bolstered house hold wealth and made banks filthy rich. Job markets in USA is booming. Consumers were stayed at home for several months. During stay at home, US citizens recived billions of cash support, boom in  equities, crypto markets, real estate, commodities resulted in major boost in household wealth which has inspired revenge buying.  Reflation trade powered by cheap money is now showing steep price rise and USA inflation matrics does indicate inflation is on rampage. Fed would be compel to go for faster hikes, dial back their QE programs. 

Roaring 2021- Consumer boom in USA, Europe is out of Recession, FOMO- Animal spirits rocking 

2021 begin with a bang. Consumer boom in USA and bull market in everything powerd by FOMO- fear missing out element is back. Several parts of global economy reached at precovid level. Crude oil demand is back. USA GDP growth is seen at 6% plus, best in last 40 years. Chinese economic rebound is also specteculer amid strict lockdowns. Europe manage to escape from recession after 20 years, owing to free flow of super cheap money. Economic rebounds, vaccinations, unlock down and massive liquidity is a dry poweder available to inflate bubbles. Global economy tanked during 2020, risk were downside, few months later, risks now shifted to upside. Risk of economic overheating and inflation is threatening to derail the virtues cycle- Feed back loop of goldilcok economy. 

Macro outlook : 1 Dollar cotton, split weather, supply disruption 2.0, 

Cotton market are booming due to solid consumption rebound, healthy export parity and manufacturing margins and strong manufacturing and consumption rebound in 2 major economy- China and USA. Chinese shopping spree in global commodity markets is extremely strong. China purchased massive amount of graisn, steel, industrial commodities, energy products as well. 

From market perspective, major drivers are, demand backlogue is much stronger and supply shocks due to production cutbacks, ( some are man made, some are Climate policy induced) etc caused a temporary demand supply diseqilibrium. Soaring shipping rates and supply chain disruption- Relocation of supply chains due to covid related issues and geopolitical issues may bring long lasting changes for international trade. 

Technically speaking, ICE cotton is a stealth bull market. 1 Dollar cotton is buzzword among cotton bulls. Current 

Biden Administration and European governments are new climate fanatics and they will impose stringent low carbon economy rules on  world.  Decarbonization – carbon neutral economy drive is Big macro driver for next few years.