After rising in the first half of March, global cotton prices declined in recent weeks. The May New York futures contract fell from values around 92 cents/lb to those near 86 cents/lb. The A Index retreated from levels approaching 100 cents/lb to 92 cents/lb. Chinese prices, represented by the CC Index (grade 328), moved marginally higher and reached 19,380 RMB/ton in the most recent data (142 cents/lb at current exchange rates). Spot prices for both Indian and Pakistani cotton have been stable, with prices for India’ s Shankar-6 holding to values near 91 cents/lb (38,800 INR/candy) and the base grade Pakistani prices trading near 85 cents/lb (6,800 PKR/maund).

 

Officials from the National Development and Reform Committee (NRDC), the agency responsible for administering China’ s reserve program, confirmed that reserve purchases will continue without limit in the coming crop year. The price guaranteed for 2013/14 purchases has been set at 20,400 RMB/ton (149 cents/lb at current exchange rates), which is the same level as 2012/13. For both of the past two crop years, reserve purchases were made between September and March. During the 2012/13 purchasing period, a total of 6.5 million tons (29.9 million bales) were bought. This represents 85.3% of the USDA’s estimated Chinese harvest.

 

With so much Chinese cotton flowing into reserves and being withheld from the market, questions remain regarding how the Chinese government might eventually decide to supply their mills with the 36.0 million bales of cotton they are expected to consume this crop year. The central point of uncertainty is what volume will come from reserve sales versus the volume that could be allowed under import quotas. Distribution of quota is reported to be underway according to the 3:1 ratio of reserve purchases to quota that was long rumored. Expectations are that several hundred thousand tons of additional quota will be released for the processing trade (imported fiber incorporated into products for eventual export). In the sales from reserves that began January 14th, a total of 1.1 million tons (4.9 million bales) have been sold at a base sale price of 19,000 RMB/ton (139 cents/lb at current exchange rates).

 

This month’ s USDA report featured a 1.5 million bale increase in the Chinese import figure (from 15.0 million to 16.5 million bales). With Chinese production and consumption estimates unchanged, these additional imports are expected to result in China holding 1.5 million bales of additional ending stocks. Import forecasts for India (+200,000 bales), Vietnam (+150,000), and Brazil (+75,000) were revised higher and the global import figure increased 1.8 million bales (from 41.9 million to 43.7 million). To supply these additional imports, export projections for India (1.5 million bales), the U.S. (+250,000), and Australia (+200,000) all increased.

 

Global production (-173,000 bales, from 119.9 million to 119.7 million) and consumption (+323,000 bales, from 107.1 million to 107.4 million) projections were relatively unchanged. At the country-level, the most important revisions to production estimates were for the U.S. (+280,000 bales) and Brazil (-500,000). The largest revisions for consumption figures were for India (+250,000 bales) and Vietnam (+100,000).

 

A series of revisions to historic data for India added 1.2 million bales to 2012/13 beginning stocks. These changes, along with the combination of lower world production and higher world consumption, resulted in a larger world ending stocks figure (+709,000 bales, from 81.7 million to 82.5 million). The current forecast for 2012/13 ending stocks exceeds the previous record, set last crop year, by nearly 20% (12.3 million bales). Relative to the record set prior to the 2010/11 price spike (62.8 million bales in 2006/07), the projection for 2012/13 is more than 30% higher.

 

With this huge amount of cotton stocks, it could be expected that cotton prices would be trading at levels far below their current values. A likely reason that the world’ s cotton prices have not collapsed with burgeoning stocks are Chinese cotton policies that prevented record supplies from fully weighing on prices. China is forecast to hold 55.3% of global stocks at the end of the current 2012/13 crop year. Following China’ s announcement that unlimited purchases are to occur again in 2013/14, stocks could concentrate further in China in the coming crop year, with the implication that Chinese cotton policy will continue to be a major force determining the direction of world cotton prices.