China factor fuels debate on cotton price outlook

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Cotton futures, upgraded by Macquarie, gained a lukewarm vote of confidence too from Commonwealth Bank of Australia, which turned less downbeat on prices, citing the tightness of US supplies.

The 650,000 tonnes (3.0m bales) at which US cotton inventories will end 2013-14, according to US Department of Agriculture forecast unveiled last week, represents a figure well below historic levels, CBA said.

“US cotton inventories averaged more than 1.35m tonnes in the 2000s,” the bank said.

“Declining US production and tightening inventories would typically support prices.”

US vs China

However, while the bank indeed raised its forecast for cotton prices in the second half of 2013 by 7.4 cents a pound, at 78.2 cents a pound, the new estimate remained below the futures curve.

“In stark contrast to the US, the global supply situation suggest prices will fall heavily in the year ahead,” with the world inventories set to hit a record 20.2m tonnes – equivalent to more than 10 months’ supplies – although the prospect of so much of it being in Chinese hands clouds the situation.

The USDA foresees China ending 2013-14 with 12.7m tonnes of cotton, enough to support consumption for well over one-and-a-half years, thanks to a programme of farm support which offers growers high minimum prices, compared with international values.

The potential for China hereon to cut imports “will limit the extent of price increases from current levels. Indeed, we expect prices to decline from current levels”.

‘Unsustainable position’

The extent of cotton hoarding will make “China’s stockpile management programme the most important factor affecting global cotton prices in 2013-14 and beyond”, CBA analyst Luke Mathews said.

However, like other commentators, he said that predicting China’s strategy for its stockpiles was “extremely difficult”.

“It is impossible to guess the ‘target’ inventory level. It is also impossible to know if such a ‘target’ exists at all.”

Nonetheless, he termed the inventory position “unsustainable”, noting that between 1980 and 2011 China’s stocks-to-use ratio for cotton averaged 56%, and exceeded 100% only four times.

‘Bullish influence’

CBA’s price forecast compares with an estimate from Macquarie of values averaging 86.5 cents a pound in the second half of the year, flagging the extent to which “cotton supplies outside of China are getting restricted”.

“As the US is one of cheapest sources of high quality cotton, most of the world’s mills are turning to US exports for their needs,” Macquarie said.

“In turn, this is leading to a tightening domestic situation in the US, which is having a bullish influence on New York cotton futures.”

“In 2013-14, we could continue to see a two-tier market, with the heavy situation in China being largely separated from the rest of the world.

“The only way the two could re-calibrate would be for China to sell their reserves at below costs – unlikely – or for world price to reach higher levels to encourage Chinese sales.

“As the world ex-China tightens, this may be the only way to boost supplies in the free market.”

‘Bearish outlook’

Other banks commenting on cotton in recent days include Rabobank, which said that with China’s reserves so high, and “the growing trend of yarn imports within the textile manufacturing sector,” the country’s cotton buy-ins would fall to 7m bales in 2013-14.

“This is a bearish outlook for cotton prices.”

The USDA has forecast China’s 2012-13 cotton imports at 12.0m bales.

Standard Chartered restated a “neutral” rating on cotton prices, saying that “although we note that the US has less cotton to export, China will not be wanting much anyway given the forecast increase in China’s inventories”.

Source: AgriMoney

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