The setback in cotton futures may prove only temporary, Macquarie said, bringing forward its forecast for prices hitting 100 cents a pound – but joining commentators cautioning over new crop prospects.
New York cotton futures, which eased last week on talk of releases of reserve stocks in China and India, extended their decline on Monday, falling 0.4% to 86.98 cents a pound for the benchmark May contract as of 07:00 local time (11:00 UK time).
The drop took above 7% the decline in the contract from a one-year high reached on March 15.
However Macquarie, which in January forecast prices returning to 100 cents a bushel, stood by its hopes for the price level being reached – and earlier than it had forecast.
‘Some 10-15% upside’
“We still think 100-cents-a-pound cotton is possible this year – implying there is some 10-15% upside still left for prices,” Macquarie analyst Kona Haque said.
“But we now think it will happen to old crop cotton, ie the May or July futures contracts,” rather than occurring later in 2013, with the December contract, as the bank originally estimated.
Indeed, Macquarie joined the commentators warning of the potential for pressure on prices later on from US sowings which look like turning out higher than had originally been expected, an idea given further impetus by Informa Economics estimates on Friday.
“There is a strong risk that farmers may decide to dedicate more of their acres to cotton than previously shown,” by an industry survey in February which came in with a 9.0m-acre figure, said Ms Haque, who has pegged US seedings at 9.8m hectares.
“If this happens, then it would be bearish for new crop cotton.”
The prospect of better prices short-term reflects talk of China, the top cotton importer, issuing up to 800,000 tonnes in further quota for low-tariff buy-ins, at a time when inventories in the US, the biggest exporter, are already tight.
The US Department of Agriculture has continued to reduce estimates for domestic stocks at the close of 2012-13, reflecting firm exports, which have reached 7.2m bales so far, up 22% year on year.
“The reason why the market rallies so much when US export sales data are strong is the fear that old crop cotton supplies will tighten substantially before relief from the new 2013-14 harvest is due,” Ms Haque said.
While the forecast ratio of US stocks-to-use is, at 26%, above levels which helped sent cotton prices to record highs above 200 cents a pound in 2011, “things could tighten up should demand for US cotton rise further”.
Price and quality concerns
Chinese appetite for US cotton, despite the country’s huge inventories snapped up for state reserves, reflects the high price at which these purchases have been made, meaning they are being sold at above-market values too.
“The high reserve asking price of 20,400 remninbi per tonne is clearly too expensive for mills,” Ms Haque said, adding that she had heard talk too that many ginners had been “dissatisfied” with the quality of supplies on offer.
“It is therefore likely that China will continue with a combination of both reserve sales as well as import quotas to meet their textile mills’ needs.”