New York futures prices drifted higher in December. Values for the March contract rose about five cents/lb, increasing from levels near 72 cents/lb to 77 cents/lb. Most recently, prices have held to levels near 75 cents/lb. Movement in the A Index has been marginal, with values fluctuating between 82 and 85 cents/lb. Questions related to future price direction remain centered on the Chinese cotton policy.

 

Since purchasing for the current crop year began in September, the Chinese reserve system has bought 5.6 million tons (25.6 million bales). This volume represents 76.4% of the current estimate for China’s 2012/13 harvest (33.5 million bales). With so much of this year’s crop going to government warehouses, where it can be indefinitely held, a major source of uncertainty for the global cotton market has been how China would decide to supply its mills. 

 

Some clarity regarding Chinese cotton policy emerged recently, when the Chinese government indicated it would pursue a policy of supplying mills through a combination of imports and cotton from reserves. A volume of 3.0 million tons (13.8 million bales) is to be sold in auctions beginning January 14th. The price for this cotton will be 19,000 RMB/ton (Chinese base grade 328), which is equal to 139 cents/lb at the current exchange rate of 6.22 RMB/USD. While the cotton sold at these auctions is at a discount relative to the price that the Chinese government is purchasing cotton (20,400 RMB/ton or 149 cents/lb at current exchange rates), the price for cotton to be released from reserves is still at a steep premium relative to the A Index. The time period for this round of sales is through March 31. During this time, mills are eligible to buy a volume equal to two months of their annual consumption.  It was also announced that reserve purchases will be linked to import quota through a ratio of 3:1, implying that mills who buy from reserves will receive import quota equal to one third of the amount they purchased from the government. Details related to the time at which imports might be allowed into the country relative to the timing of mills’ reserves purchases have not been announced.

 

Changes to Chinese figures were the most significant in the latest USDA report. With the acceleration in purchases by the reserve system, the Chinese harvest estimate increased 2.0 million bales. Notable revisions to production estimates were also made for the U.S. (-247,000 bales) and Australia (+200,000). The global production figure increased 1.9 million bales (from 116.9 million to 118.8 million). Given the announced ratio between reserve sales and import quota, the Chinese import figure was revised 1.0 million bales higher. Vietnam was the only other country with a noteworthy change in its import estimate (+100,000 bales). In response to the 1.2 million bale increase in global import demand, export forecasts for India (+500,000), the U.S. (+400,000), Brazil (+200,000), and Australia (+100,000) were all revised higher. Consumption estimates were generally unchanged, with the world figure declining only 420,000 bales (from 106.5 million to 106.1 million). The largest country-level revisions to mill-use figures were for India (-500,000 bales) and Vietnam (+100,000). 

 

In combination, this month’s revisions resulted in a 2.1 million bale increase in world ending stocks (from 79.6 million to 80.7 million) and a 2.3 percentage point increase in the global stocks-to-use ratio (from 74.8% to 77.1%). While increases in stocks are generally associated with downward pressure on prices, the importance of Chinese government policy in the current market must be emphasized. In the latest report, country-level estimates outside of China decreased about 1.0 million bales. The largest revisions were for the U.S. (-600,000 bales), Pakistan (-250,000), Brazil (-200,000), and Australia (+100,000). Meanwhile, with higher harvest expectations and a larger import forecast, the figure for Chinese stocks increased 3.0 million bales. At 40.6 million bales, the current projection for Chinese ending stocks represents 49.7% of the forecast for world stocks at the end of the 2012/13 crop year (81.7 million bales). 

 

Given the concentration of global supplies in China, China’s cotton policy will likely remain the most important influence on future price direction. Nonetheless, there are several other factors that will also shape the price outlook. Prominent among these is cotton acreage.  Since the summer, corn and soybean prices have been high relative to cotton prices. This suggests an important decline in world cotton acreage for the 2013/14 crop year.  Government guaranteed minimum prices could help maintain acres in China and India.  Survey-based estimates regarding U.S. cotton acreage will be released at the National Cotton Council’s Annual Meeting on Saturday, February 9th. The USDA will release preliminary figures for world acreage, production, and consumption at their Outlook Forum meeting held February 21-22.