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Cotton as a lucrative investment for Hedge Funds

Raw cotton prices are witnessing a surge owing to a fall in global production by up to 5-7% this year and greater demand.

According to experts, the main reason for the fall in production is a shift by major cotton producers like the US to more lucrative crops like corn. Besides India and the US, China and South Africa are the other major producers of cotton.

“In India, the expected raw cotton production in 2007-08 is 3.25 crore bales. This includes the production in Gujarat, Maharashtra, Punjab and Andhra Pradesh.

Till May 2008, more than 95 lakh bales of raw cotton were exported to countries like China, Pakistan, Bangladesh and Taiwan,” said Anandbhai Popat, secretary of Saurashtra Ginners Association.

He pointed out that, in 2006-07, the total export was just 60-65 lakh bales.

Mr Popat said due to high exports, the prices of raw cotton have reached Rs 25,000 per candy from Rs 19,800. By the end of the season in June, only 40-45 lakh bales will be left in the market.

The rest have been either utilised in the domestic market or exported.

“US hedge funds are looking at cotton as a lucrative investment. Moreover, rising demand for cotton has led to the price escalation. The price of US cotton for December 2008 future contract has witnessed a steep hike – from 70 cents per lbs to 98 cents per lbs in the last two months, coming down to 82 cents per lbs at present,” said Mr Popat.

In international market, cotton is currently quoted at 80 cents per bale against 60-65 cents last year.

The sudden demand for Indian raw cotton in global markets is thanks to the extensive use of Bt cotton seeds and improvement in quality of cotton.

The surge in prices may see more farmers shifting over to cotton and this may increase the acreage by 5%, according to experts. As per the estimates in June 2007, which marks the beginning of the sowing season, around 25.40 lakh hectares was utilised to sow cotton.

Looking at the higher prices farmers received this year, at least 5% increase in sowing area is anticipated in June 2008.

In the domestic market, for the season between November 2007 and June 2008, farmers were offered Rs 610 per 20 kg of raw cotton, which is Rs 70 more than the price last year.

Experts say that only a rising rupee can play a dampener, as this will make Indian cotton expensive in the international market.

Source: Economic Times

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