Monthly Cotton Economic Letter (2013.05)

Jul 02, 2013  |  by
Despite some volatility, recent values for New York futures and the A Index are nearly even with those a month ago. After losing nearly five cents and dropping below 85 cents/lb, July New York futures contract bounced back to levels near 87 cents/lb. The A Index also lost approximately five cents/lb and approached values near 90 cents/lb before climbing back to 95 cents/lb. Spot prices in both India and Pakistan moved slightly lower last month. Values for the Indian Shankar-6 variety decreased from 91 to 88 cents/lb (from 39,000 to 37,500 rupees/candy in local terms). Pakistani prices decreased from 84 to 79 cents/lb (from 6,800 to 6,450 rupees/maund in local terms). Due to a strengthening RMB, Chinese prices, as represented by the CC Index (grade 328), increased marginally in cents/lb (from 142 to 143 cents/lb) while declining slightly in local terms (from 19,380 to 19,350 RMB/ton).
 
The USDA’s May report is the first to feature a complete set of estimates for an upcoming crop year. As was the case in the partial set of preliminary estimates released in February, expectations are that 2013/14 will be the fourth consecutive crop year where world production will exceed world consumption and result in an increase in global ending stocks.  In 2013/14, world stocks are forecast to increase 8.0 million bales (+9.4%) and to reach a record 92.7 million bales.  The stocks-to-use ratio is expected to climb to a record 83.9% (78.4% in 2012/13). 
 
Due to lower cotton prices relative to those for crops that compete for cotton acreage, planted acres and production are expected to decline slightly in the upcoming crop year. The forecast for 2013/14 world production is 117.8 million bales, 2.6% lower than in 2012/13 (120.9 million bales) but 15.7 million bales higher than the recent low of 102.2 million bales experienced in 2008/09. At the country-level, the most significant changes in production are for Brazil (+1.2 million bales), India (+500,000), Australia (+200,000), Argentina (+165,000), Mali (+120,000), Mexico (-240,000), Greece (-265,000), Turkey (-350,000), China (-1.0 million), and the U.S. (-3.3 million). 
 
With expectations for slow global economic growth, 2013/14 world consumption is forecast to be 110.4 million bales, which is 2.1% higher than in 2012/13 (108.2 million bales) but about 10% lower than the levels near 120 million bales experienced prior to the 2008/09 recession and the 2010/11 spike in fiber prices. The largest country-level changes in cotton consumption are forecast for India (+750,000 bales), Pakistan (+500,000), and Bangladesh (+200,000). Brazil, Indonesia, Mexico, Thailand, Turkey, and the U.S. are all expected to increase consumption 100,000 bales. Chinese mill-use is projected to be unchanged at 36.0 million bales. The increase in consumption in countries outside of China could be seen an indirect result of Chinese cotton policy, which has maintained Chinese fiber prices at levels significantly higher than those in other countries. 
 
One of the policy instruments used to support domestic prices is the reserve system, which buys and withholds cotton from the market. During the 2012/13 purchasing period, 85% of the USDA estimate for China’s harvest (35.0 million bales), were bought by the reserve system. With such a large proportion of the domestic crop flowing into government reserves, the central question for world price direction has been how would the Chinese government decide to supply Chinese mills – through releases from reserves or through imports. Last month, the Chinese government indicated that it will operate the reserve purchasing system in the same general manner in the 2013/14 crop year, making unlimited purchases from the domestic crop at the same guaranteed price of 20,400 RMB/ton (151 cents/lb at current exchange rates). If a similar proportion of the 2013/14 crop flows into reserves, the same central question of how Chinese mills will be supplied could be assumed to continue to drive cotton price direction around the world.
 
Expectations are that Chinese mills, which represent one-third of global consumption, would be supplied by a combination of both releases from reserves and through imports. However, the proportion coming from reserves versus imports has been a significant source of uncertainty, and there were important changes to the USDA’s estimates during the current crop year. Since October, the figure for 2012/13 Chinese imports increased 66%, rising from 11.0 million bales to 18.3 million. For 2013/14, Chinese imports are forecast to drop to 12.0 million bales. Even with the expected decline in Chinese demand, ending stocks in several major exporting countries, most notably the U.S., are expected to decrease. This tightening could put some upward pressure on international prices in 2013/14. This pressure could be expected to intensify if the current, early, estimates for Chinese import demand prove once again to be too low. 
 

2024.12   

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