Unusual Situation for China to Hold Half of 2012/13 Carryover Stocks

January 16, 2012

2012/13 season include slightly lower production and higher offtake. That results in a sizable reduction of 600,000 bales to 4.8 million in ending stocks for the season from last month. Exports were increased a significant 400,000 bales to 12.2 million because of continued import demand by China. The 2012/13 season’s estimated producer price range is 66 – 71 cents per pound.

However, the world 2012/13 estimate shows more production and a little less consumption. Production was increased mainly in China and Australia, and consumption reduced for India.

The record 82 million bale world carryover stocks are divided half in China and the rest is held by countries outside of China. This alignment of stocks is unusual. The market issue is how policymakers in China will manage the use of their huge cotton surplus. 

China’s cotton stockpile is 114% of domestic use for this season. Will they hold it or release some of carryover cotton supply?

More carryover than a season’s use in China has not happened since a 144% carryover in 1998/99 and 105% in 1999/00. There is an important implication as how did U.S. producer prices react. During the 1998/99 season buildup in stocks, the U.S. price averaged 62 cents. However, as indicated in the chart, U.S. prices dropped much lower by the next season. With half the total 82 million bale world carryover in China, the excess supply tends to place a lid on higher prices for the 2013/14 season. What has happened in the past tends to be a leading indicator for the future.

Yet, the current March futures have been edging higher. The relative strong market results from textile mills outside of China that use two-thirds of the world’s cotton, and are competing to purchase from only half of the total cotton supply. China’s cotton program controls the other half of stocks, even though they use only onethird of the world’s cotton.

The world cotton supply and demand relationship is out of balance due to the management of Chinese cotton policy. Thus, the cotton market price movement for the 2013/14 season is extremely sensitive and uncertain.

With grain and soybean prices more favorable than cotton, U.S. and foreign acreage and production are expected to decline at least 10%. Even so, there will still be an excess of cotton.

Producers need to evaluate market developments closely and look for price rallies to price some of their cotton fairly early. The use of several marketing strategies may help in managing the potential for surprise price decreases as the season progresses. Consider several market alternatives such as marketing pools, market associations, and use of options. Forward contracts, if any, need to be carefully evaluated, especially as to reliability of contract. Unexpected price movements are difficult to manage at a reasonable cost.

New crop cotton prices based on December ’13 futures are expected to trade sideways. At this time, the high and low prices are likely to trade in the mid 70’s to the mid 80’s. Consider fixing a part of your production spread over rallies above 80 cents.


Share This: