Monthly Cotton Economic Letter (2013.03)

Jul 02, 2013  |  by
After drifting sideways throughout most of February, cotton prices surged higher late in the month and climbed to their highest levels in 10 months in early March. Values for the May New York futures contract have been consistently above 86 cents/lb in recent trading. In the first half of February, May futures traded between 82 and 85 cents/lb. From October through January, May futures traded between 72 and 78 cents/lb. The A Index has followed a pattern similar to New York futures and recently climbed above 93 cents/lb. In February, the A Index held to values between 88 and 91 cents/lb. From October through January, the A Index was generally between 80 and 85 cents/lb. Mill-delivered prices in China (CC Index) have been stable near levels guaranteed by reserves. Spot prices for the popular Shankar-6 Indian variety have risen about 10% since early February (from 80 cents/lb to 88 cents/lb).  Pakistani prices also increased about 10% over the past month, with official spot rates rising from 75 cents/lb to just over 82 cents/lb.
 
In the March report, the USDA made their first large upward revision to world consumption since the onset of the 2012/13 crop year (+875,000 bales, from 106.2 million to 107.1 million). Most of the global increase was a result of higher mill-use figures for China (+500,000 bales), India (+250,000), and Bangladesh (+100,000). The addition to the consumption figure was nearly matched by the increase to the production estimate (+917,000 bales, from 119.0 million to 119.9 million). The larger world harvest figure was a result of higher forecasts for China (+1.0 million bales), Uzbekistan (+200,000), Mexico (+106,000), and Turkmenistan (+100,000). These upward revisions were only partially offset by diminished expectations for Pakistani (-300,000) and Brazilian (-200,000) crops.  Global trade estimates were revised 1.4 million bales higher. China (+1.0 million bales), Pakistan (+250,000), and Bangladesh (+100,000) are expected to import more than previously estimated. Export figures for India (+1.0 million), the U.S. (+250,000), Australia (+100,000), Turkmenistan (+100,000), and Uzbekistan (+100,000) all increased. 
 
With a slight decrease in the world beginning stocks estimate (-50,000) and a slight increase in the loss figure (+50,000, loss entries are used by the USDA to allow for unaccounted changes in cotton supply), the figure for 2012/13 ending stocks was revised slightly lower (-118,000 bales, from 81.9 million to 81.7 million). Upward revisions to Chinese production and import figures suggest that the world's stocks will be more concentrated in China than previously estimated. The figure for 2012/13 Chinese ending stocks is 44.1 million bales, which represents 54.0% of world stocks.
 
At the USDA Outlook Forum on February 22nd, a partial set of preliminary estimates for supply and demand in the upcoming 2013/14 crop year were released. The first full set of estimates will be released in the May report. The preliminary figures assume that Chinese cotton policy will remain unchanged and suggest a further concentration of the world's cotton supply in China in 2013/14. Given lower cotton prices relative to crops such as corn and soybeans that compete for cotton acreage, a 3.0% decrease in world production was forecast. China (-3.0%), the U.S. (-17.7%), and Australia (-17.0%) are expected to collect smaller harvests, while India (+2.0%), Pakistan (+4.0%), and Brazil (+15%) are expected to have larger crops. With world economic growth predicted to accelerate in 2013 and again in 2014 (IMF projections), world consumption is expected to increase 2.6%. Chinese mill-use, however, is expected to decrease 4%. This is due to the assumption that China will continue its current policy of maintaining high domestic prices. These policies are expected to benefit other major spinning countries which can freely export yarn to China and may also capture market share for downstream orders for fabric and apparel. Consumption for countries outside of China is expected to increase 6%.
 
Despite a decrease in global production and an increase in global consumption, world cotton stocks are forecast to grow for the fourth consecutive crop year and rise another7.9% in 2013/14. Following the assumption that current Chinese policies will continue, stocks are expected to become even more concentrated in China. Chinese stocks are forecast to increase 16.3%. While helpful to have early projections, it is important to remember that no announcement has been released by the National Development and Reform Commission (NRDC) regarding reserve prices for the upcoming 2013/14 crop year. Likewise, no official announcement has been made regarding imports for the current 2012/13 crop year.  Eventual decisions regarding both price level guaranteed by the reserve program and the amount of import quota released should have a major impact on world cotton prices. For the past two crop years China has supported prices around the world as a major buyer of domestic and international cotton. However, China cannot accumulate supplies indefinitely and could eventually be expected to sell. The timing and aggressiveness of eventual sales from Chinese reserves should be expected to significantly impact prices.

2024.12   

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