The International Cotton Advisory Committee cut its forecast for cotton prices to a six-year low, despite sticking by a relatively upbeat estimate for Chinese imports, for which many other commentators are cutting expectations after quota curbs.
The intergovernmental group cut its cotton price forecast for 2014-15 for a second successive month, this time by 5 cents to 75 cents a pound, taking the estimate below the 2009-10 result of 78 cents a pound.
The downgrade reflected the second in two days from a leading commentator, after Goldman Sachs on Wednesday slashed its forecast for New York futures on a three-month horizon by 20 cents to 55 cents a pound.
The ICAC estimate is based on the Cotlook A index, which typically trades above futures, as it includes an element for transport.
‘Prices unlikely to rise’
The committee said its price estimate reflected in part a forecast for a 1.8m-tonne world production surplus this season, an upgrade of 800,000 tonnes from last month, reflecting largely improved harvest hopes for India.
Indeed, the ICAC, lifting its estimate for Indian output by 300,000 tonnes to 6.6m tonnes, said that sowings there had risen by 5%, “as the delayed monsoon encouraged farmers to switch to cotton”.
However, the ICAC also “changes in China’s cotton policy” as a reason why “prices are unlikely to rise to the levels seen in the last two seasons”.
China has this season ditched a guaranteed cotton pricing regime for farmers, which in offering values well above international levels prompted a huge build-up in inventories.
And last week, it said it would not, unusually, in 2015 issue import quota beyond the 894,000 demanded by World Trade Organization obligations.
‘Some mills still hold quota’
“The restriction on imports next season was likely implemented to help reduce the large government-held cotton stocks,” the ICAC said, noting that Chinese output, at 6.4m tonnes, was likely to fall some 1.5m tonnes behind production.
Nonetheless, the ICAC stuck with a forecast for Chinese imports of 2m tonnes for 2014-15 – which started in August – noting that “some mills still hold quota for 2014”.
While down 36% year on year, this figure is above estimates from other observers.
The US Department of Agriculture forecasts China’s imports this season at 1.74m tonnes, while analysis group Cotlook, which compiles the Cotlook A index, last week slashed its forecast from 1.9m tonnes to a 10-year low of 1.3m tonnes.
China’s import curbs signal “an end, at least temporarily, to China’s massive absorption of exports from the major producing countries, including the US,” Cotlook said.
Societe Generale has forecast imports of 5.6m bales (1.2m tonnes), despite highlighting a potential need in China for quality cotton.
Cotton vs rival fibres
The ICAC added that, despite the forecast drop in prices this season, from an average of 91 cents a pound in 2013-14, it may prove slow to regain acceptance by mills hurt by the sharp jump, and slump, in prices over 2010-2011.
“While cotton’s absolute volume of consumption is likely to grow, it will probably not gain back much of its market share as it takes time for the market to adjust.
The price volatility early in the decade “is not forgotten, and other competing fibres’ market shares have been growing”.
The Cotlook A index opened October at 69.65 cents a pound.
New York cotton futures for December stood 0.03 cents higher at 62.19 cents a pound in early deals.