New stock arrivals as well as the Omicron Covid-19 variant's expected impact on demand is likely to arrest any further rise in cotton prices during the short-term, said India Ratings and Research (Ind-Ra).
As per the credit ratings agency, cotton prices are expected to get corrected in the short term, because of increased new arrivals as well as the spread of the Omicron variant which would impact demand.
Till recently, healthy international and domestic demand along with minimal opening stock, sustained high prices.
"The continued surge in domestic cotton prices during November 2021 was led by a rise in international and domestic demand along with minimal opening stock, despite new cotton arrivals and nil procurement by Cotton Corporation of India," the agency said in a report.
Accordingly, the prices of 'Shankar-6' (medium staple) increased by 14 per cent month on month (MoM), and remained higher by 55 per cent year on year (YoY) because of the strong demand and lower base effect.
"Prices in China also shot up in November 2021 due to a YoY lower cotton output for the current season, leading to a supply shortage amid the strong demand."
Besides, Ind-Ra expects inventory levels to decline by end of the current cotton season with the lower opening stock and a slightly higher consumption.
"Incremental consumption levels are likely during the current season against a marginal increase in production, hence reducing the expected ending stock as per USDA-FAS."
"Similarly, the domestic stock-to-use ratio is expected to decline in the new cotton season."
In addition, Ind-Ra expects 'cotton yarn' and 'spurn yarn' prices to continue to rise in the short term, due to a higher demand from downstream players as well as export markets.