US farm officials highlighted the uncertainty over one of the biggest numbers in the cotton market – China’s imports – by cutting their forecast to a level 30% below an estimate issued by a leading sector group earlier this week.
China’s imports are widely expected to fall dramatically in 2013-14, a reflection of the extent of the country’s inventories, which account for more than half the world total, and high domestic prices which have prompted many textile mills to buy in foreign yarn.
However, exactly how fast that decline will be from the 20m bales (4.4m tonnes) or so last season is the subject of some debate, with the answer a matter of potentially huge importance for international prices.
China is by far the biggest cotton importer, responsible for more than 40% of world buy-ins last year, and for keeping world prices well above the level that would be expected given that worldwide inventories are the highest ever.
‘Huge domestic stocks’
The International Cotton Advisory Committee earlier this weekforecast a, relatively, small decline in imports, to 3.1m tonnes, flagging that buy-ins remain considerably cheaper than the price, equivalent to more than 130 cents per pound at which China is selling cotton from state stockpiles.
“The sales price of cotton from China’s reserve is significantly higher than the import price with a 40% tariff,” the ICAC said.
However, the US Department of Agriculture’s bureau in Beijing cut their estimate for China’s imports to 2.2m tonnes, below the department’s official 2.4m-tonne forecast, besides the ICAC number, and citing “massive state stocks, import constraints and slowing consumption”.
It added: “Huge domestic stocks, tariff rate quota constraints and softening consumption and factors which continue to influence import demand.”
Cotton vs yarn
In fact, imports fell by 26% to 618,340 tonnes in the August-to-October period, the first quarter of the 2013-14 marketing year.
And the bureau highlighted the appeal to textile mills of turning abroad for yarn, over which there is no import quota, and which is cheap compared with home-grown raw cotton itself.
The average price of imported yarn for the first 10 months of the year averaged $3,212 a tonne, not far off the floor value of $3,344 a tonne at which the government buys cotton itself in an effort to support farmers – but a drive which has skewed the domestic market, hiking market prices.
The fall in imports of cotton contrasts with a 46% jump in yarn buy-ins in the January-to-October period.
Indeed, China’s yarn imports, forecast at 2m tonnes in 2013, are becoming comparable with those of cotton.
Change of policy
The bureau also highlighted the potential for a change to China’s cotton support policy, to resolve the market distortion caused by the current regime.
“In a recent industry seminar, a government official suggested that China may reposition cotton in its economy due to its lack of comparative advantage, compared to other crops, and the availability of international cotton resources to meet China’s textile industry demands.
“A new policy is expected to be announced in 2014.”
Measures under discussion include direct support to farmers and enhanced crop insurance.