Spot Indian yarn and the forward spread widens with rising Indian cotton

Recently, driven by higher seed cotton, Indian cotton price has been rising. According to relevant sources, the price of seed cotton exceeded $0.94/kg and traded price ranged from $0.99/kg to $1.07/kg in some regions. Indian seed cotton prices partly rose to $1.11/kg, and cotton farmers and traders believed that the delay of Indian cotton may continue to push up seed cotton prices.

It can be seen that Indian cotton price has kept rising since National Day holidays. Indian cotton yarn prices also rose sharply from 56,000rupees/candy on October 6th to around 63,700rupees/candy on Oct 29, up 13.75%.

In mid-October, the price increase of the forward Indian yarn price was at 10-20cents, or higher over 30 cents, and the offers were falsely high. Reviewing the quotations of Indian yarn mills in the past few years, in the case of a large rise in the price of Indian cotton, or the imbalance between supply and demand, virtual-high Indian cotton yarn appeared. With the rising Indian yarn, domestic traders mostly thought that ordering risk was relatively high, and they showed weak willingness to purchase the Indian yarn. From the price spread between the spot and the forward, the spot price was mainly lower than the forward, and mainstream price spread ranged from 1,000 to 3,000yuan/mt. In addition to the price spread, the power rationing policy in downstream areas, weak consumption capacity, and soft demand were also one of the important reasons for traders' hesitation.

Furthermore, the exchange rate can also be considered. Recently, RMB exchange rate against the US dollar has fluctuated relatively violently. The depreciation of the dollar has been obvious since October 12, with the onshore RMB exchange rate falling from 6.4485 to 6.3820 on October 26, until October 29, it was roughly around 6.3917. Due to the exchange rate fluctuation, purchase cost of traders reduced by about 100-300yuan. The fall in the exchange rate was far from enough to offset the rise in the forward price.

　　The spot price was much lower than the forward. Although exchange rate fluctuations reduced certain costs, the risk of ordering was higher, it was not an appropriate time to order by considering the domestic downstream situation.