Global cotton-output concerns are overstated


LONDON–Morgan Stanley MS +1.44% said Wednesday that recent concerns over world cotton production are overstated, with likely losses in the U.S. and India already discounted by the market and Chinese output set to surprise to the upside.

The bank estimated global stocks at the end of 2012-13 at a record-high 72.1 million bales, up from 65.9 million a year earlier, providing a buffer against any potential production disappointments.

It said conditions are still adequate for the U.S. cotton crop as drought coverage across very southern regions is continuing to ease on the year, supporting both yield and harvested acreage, while better soil moisture bodes well for abandonment rates.

Morgan Stanley added–with domestic cotton demand seen growing 3% on the year to 3.4 million bales in 2012-13–it expects that U.S. production of 17.8 million bales should leave the country’s supply and usage ratio at 28%, up from 21.5% last year and the highest since 2008-09.

Meanwhile, the bank said the Indian drought is unlikely to materially dent supply, with a 5% year-on-year decline in acreage expected to reduce cotton production from 26.5 million bales to 25.2 million bales.

It added this acreage estimate may yet prove conservative, with data through Aug. 8 suggesting the pace of sowing was down just 0.6% on the year, while recent improvements in rainfall mean it remains optimistic on the prospects for yields.

Morgan Stanley said China’s production prospects remain favorable, with cumulative precipitation across the country’s 11 largest cotton-producing states exceeding normal rates through to mid-August.

It also noted that China’s reserve policy will likely be the market’s near-term price determinant with the second annual purchase program, designed to support a domestic minimum price, soon to be embarked upon.

If the country’s willingness to scoop up excess supplies is as strong as it was last year, near-dated cotton prices are likely to find support, the bank said, with the corresponding U.S. cotton price of $0.88/lb a full 15% above the current front-month futures price.

Morgan Stanley said it expects China to again hold 50% of the world’s cotton stocks by the end of 2012-13, the country’s highest share since 1999-2000, and this supply will likely remain out of the market’s reach unless the political decision is made to release stocks, which would pose a significant risk to import demand.