NEW YORK, Aug 10 (Reuters) – The U.S. Department of Agriculture raised its estimate for global cotton stockpiles in 2012/13 to record highs on Friday, sending prices down more than 2 percent and cementing fears about a growing global surplus as demand slows.
The government raised its estimate for global inventory for the marketing season which ends next July by 3 percent, more than offsetting the cut it made in last month’s report.
The new ending stock estimate of 74.67 million 480-lb bales, based on its first field surveys for this season, would set a new record, beating the previous high, which was last season, by 10 percent, according to USDA records which began in 1960.
Analysts and traders polled by Reuters ahead of the report had on average predicted the authorities would trim their ending stock estimate to around 70 million bales due to expectations of lower crops from India, the world’s second-largest producer.
The government lowered its production estimate for the country, where weather forecasters have warned of a potential drought due to weak monsoon rains, by 500,000 480-lb bales to 23.5 million 480-lb bales.
But that was more than offset by the increase in its output forecast for China and the United States, the world’s No. 1 and 3 producers.
The issue is not just one of supply. The government cut its global demand forecast by 82,000 bales to 108.16 million bales.
While that is an increase from 105 million bales in the 2011/12 season, it falls 6 percent short of projected output.
“(The) cotton figures are bearish and gains of the last week may erode in the coming sessions,” Rabobank cotton analyst Keith Flury said.
“With demand continuing to fall and the crop outlook not being revised down, there are few supportive factors currently in the cotton market.”
Consumption has been hit by the sluggish global economy and a loss of market share to manmade fibers after the cotton market was roiled by wild prices last year.
Mills increased their use of artificial fibers in their blends after prices surged to above $2 per lb last March, their highest level since the U.S. Civil War in the 1860s, and then more than halved by July.
After gaining 10 percent since the start of August ahead of the data, prices sank over 2.5 percent immediately after the report.
By 11:40 a.m. EDT (1540 GMT), the benchmark December cotton contract on ICE Futures U.S. had moved off those lows but was still down 1.67 cents or 2.2 percent at 74.28 cents per lb.
CHINA’S STRATEGY ON STOCKPILING
China’s strategic reserve will continue to control almost half the world’s surplus stock this year, the USDA said, forecasting it will hoard an estimated 34.2 million bales.
That accounts for some 46 percent of the world stocks forecast and assumes a net increase in the state inventory of about 20 percent during 2012/13, it said.
Based on the country’s expected consumption level of 39 million bales, its textile mills could last almost a year without needing to import any cotton.
A shopping spree by Beijing, albeit at a slower pace than 2011/12, will offer some respite to the market as it grapples with the record surplus.
But it will also likely reignite concerns among textile mills about China’s control over supplies. It will also worry farmers about its potential to cause massive damage to prices if it released large chunks of material onto the market.
Speculation has mounted in recent weeks that Beijing may auction off a portion of its inventory, which already accounted for about 40 percent of the 2011/12 ending stocks.
Brokers say the aim of the stockpile is twofold: maintain ready fiber supplies for its textile mills if needed and support cotton prices for domestic farmers.
Analysts were surprised by the increase in the output forecast for the United States after the prolonged dry spell in Texas, the country’s largest producing nation, which experts said could stymie the bloom.
While nobody expects a return to the crisis that hit the region last year when crops were widely abandoned, experts have projected output will be below historic averages around 5.5 million bales unless there is rain in the next two weeks.
The USDA’s new forecast of 17.65 million bales stands in marked contrast to the 16.6 million bales projected on average by ten analysts, brokers and academics in a Reuters poll ahead of the report.
(Reporting by Josephine Mason; Editing by Dale Hudson)