India’s cotton production is expected drop by over five per cent this season. Reasons include: low water availability and inadequate Southwest monsoon in key cotton producing states and higher incidences of pest attacks. Lower production is expected to shrink India’s cotton stock to a two-year low, leading to a seven per cent to eight per cent rise in domestic cotton prices. But the lower production in India, the US and Australia will be offset by higher production in China and Brazil. So, global cotton prices are expected to remain steady. Operating margins of domestic cotton yarn spinners are likely to shrink in the financial year 2020 mainly because of lower cotton output, rising cotton prices, and moderating demand.

Demand for cotton yarn is falling. The slowdown will be mainly driven by tepid growth in domestic demand comprising three-fourths of overall demand. Growth in exports will be 9 to 10 per cent in fiscal 2020 compared with 13.5 per cent in fiscal 2019 because of trade tensions between the US and China, and the commissioning of yarn capacities in Vietnam, which enjoys preferential access to Chinese markets. This is not good news for Indian spinners. Higher cotton costs and moderate demand outlook mean they may not be able to get a commensurate increase in yarn prices.