Monthly Cotton Economic Letter (2013.02)

Jul 02, 2013  |  by
Cotton prices climbed higher throughout the second half of January and have been able to maintain their higher values into early February. The March New York Futures contract rose from 75 cents/lb to as high as 84 cents/lb. In recent trading, futures prices have flattened out and have ranged between 81 and 84 cents/lb. A Index prices, which have not consistently reacted to fluctuations in futures prices the past several months, were responsive to January’s increases. From values near 83 cents/lb in early January, the A Index increased to levels between 88 cents/lb and 91 cents/lb. Other prices from around the world have also moved higher. Over the past month, spot prices in India (Shankar-6 variety) increased 1.5% in terms of local currency. With the Indian rupee having strengthened against the dollar, the increase was 5.0% in terms of U.S. cents/lb. Spot rates in Pakistan increased 3.3% in local currency and 2.9% in terms of U.S. cents/lb. Chinese prices (CC Index 328) have been stable at levels near 141 cents/lb.
 
The most important factor for future price direction remains Chinese government policy. At the time of publication, Chinese reserves have purchased 6.2 million tons (28.3 million bales) of Chinese cotton during the 2012/13 crop year. This represents nearly 85% of the current forecast for the Chinese harvest (34.0 million bales). With so much of the crop already being withheld from the market, the question of whether the 35.5 million bales of Chinese mill demand will be met through releases from reserves or through imports is a major source of uncertainty. 
 
Since the onset of the crop year, the USDA has assumed that Chinese demand would be met through a combination of reserves and imports. Although there has not been an official announcement regarding the potential release of import quota from the Chinese government, the USDA increased their projection for Chinese imports by 1.5 million bales (from 12.5 million to 14.0 million). This revision was the largest change in this month’s USDA report, with only minor revisions to world production (+120,000 bales, to 119.0 million) and consumption figures (+176,000 bales, to 106.2 million). The largest country-level changes to production figures included increases to the Chinese (+500,000 bales) and Kazak (+100,000) figures and decreases for Pakistan (-400,000) and Turkey (-150,000). The only significant country-level change to consumption figures was for Turkey (+100,000 bales).
 
A reason why Chinese policy is so important for world cotton prices is that China is the largest source of import demand. In response to the increase in Chinese import expectations, estimates for virtually all of the world’s largest exporting countries were revised higher.  Export forecasts for the U.S. (+300,000 bales), Uzbekistan (+200,000), Australia (+200,000), Brazil (+200,000), and Greece (+100,000) were all increased.  Ending stocks figures for each of these countries were revised lower, which could indicate support for the A Index (based on export prices).  
 
The global ending stocks figure, however, was relatively unchanged (+144,000 bales, to 81.7 million). This is because the cotton that was previously expected to be stored in exporting countries is now forecast to be stored in China. The estimate for Chinese ending stocks increased 2.0 million, from 40.6 million bales to 42.6 million. At the end of the 2012/13 crop year, China is expected to hold 52% of the world’s cotton. With China holding so much of the world’s cotton and with the vast majority of China’s stocks being held by the reserve system and unavailable to the market, Chinese cotton policy can be expected to dominate the world price outlook for several years into the future.
 
Since global cotton prices have not been able to match the strength in corn and soybean prices, it is expected that planted cotton acreage will decline this spring.  Among the countries expected to see the largest declines in acreage are major exporters. The Brazilian crop that was planted this fall, after significant increases in corn and soybean prices, and will be harvested in the spring is expected to be 25% smaller than it was last year. According to the National Cotton Council’s planting intentions survey, U.S. growers are expected to plant 26.8% fewer acres for the 2013/14 harvest (-3.2 million acres, from 12.2 to 9.0 million).  With less cotton available for export, questions surrounding Chinese import demand can be expected to continue to heavily influence prices around the world. Government guaranteed prices in large consuming countries, notably China and India, could be expected to maintain cotton acreage. The reserve price for 2013/14 has not been announced, but recent surveys of Chinese farmers suggest a decline of about 4-5% in Chinese cotton acreage.
 

2024.12   

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