Market Divided Between China Policy and Rest of World

February 11, 2012

The February USDA supply/demand report was slightly favorable for the U.S. cotton industry. In the U.S, 2012/13 exports were increased by 300,000 bales to 12.5 million, and ending stocks were lowered the same amount to a reasonable 4.5 million. The estimated price received by producers for the 2012/13 season was raised to a range of 69 – 73 cents per pound.

The National Cotton Council’s survey of U.S. cotton growers indicates a decrease in planted acreage to 9.0 million acres in 2013/14 from this season’s 12.4 million. A crop around 13 million bales can be expected, 4 million less than this season. The smaller crop should satisfy demand without increasing carryover supply much and help stabilize price.

However, for this season, world production, consumption, and stocks were changed very little. Therefore, a surplus of world stocks of 82 million bales remains.

The Southern Hemisphere, mainly Brazil and Australia, is expected to produce 12.5 million bales for market competition this spring, and leave a projected carryover of almost 11.0 million bales.

Another reason for U.S. exports to weaken in the coming months is that foreign production and use are essentially in balance for the 2012/13 season.

China policy holds the key to world prices. The international cotton market is divided into China and the rest of the world (ROW). While China holds half the carryover stocks, they use only one-third of the cotton. The ROW uses two-thirds of the cotton and holds only half the stocks.

China has more cotton than they can use in a season. But, the ROW has a little more than half the carryover stocks compared to their use in twelve months. Because the ROW has to seek cotton from each other, they are adding support to the market outside of China. The futures market rallied in late January and early February. On February 11, futures settlement price was 82.92 cents per pound for March ‘13 and 83.84 cents per pound for December ’13. The excess cotton supply is in China and they are subsidizing their growers far above the ROW price. The international market place is not in balance from the standpoint of supply and demand.

Price risk for the “new” 2013 crop remains high. In the past, Chinese policy, when cotton is stockpiled, has been to decrease importing and/or dispose some of the huge supply of cotton. The last time it took four years - - from 1996 – 2000. Either way, it will reduce demand for cotton and weaken world price. The world price was 79 cents in 1996 and dropped to 53 cents in 1999.

The relative high domestic cotton price in China is reducing mill demand and increasing the use of man-made fiber.

There is an excess of cotton in the world when China is included. China cotton policy does affect price.

Currently, price seems to be moving sideways between the high-70s and mid-80 cents per pound. As price has moved up, mill demand slows. Growers should take a close look at fixing some of their 2013/14 crop above 80 cents.

In all, the downside price movement appears greater than upside potential. The use of option contracts and combinations of buying and selling option spreads are feasible.


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