March 27, 2013
China's cotton share affects world supply and prices
The scarcity of cotton outside China may lead to rising international prices.
Prices could weaken if China chooses to draw down on stocks.
The cotton market is presently focused on China as the country's aggressive reserve stocks accumulation policy has raised its ending stocks from 23% of use at the end of the 2010-11 market year to 122% at the end of 2012-13.
From another angle, China is boosting reserves over that stretch from 20.1 million bales to a projected 33.8 million bales. The 13.7-million bale hike tops the 2012-2013 projection of 12.75 million bales for US exports. The USDA's projection for China could isolate another 7.2 million bales in its reserve during 2013-14.
China's claim over free supplies has split the cotton market between the Asian giant and the rest of the world. "The division creates great uncertainty because cotton policy in China is flexible," cautions Carl Anderson, Texas A&M University economist. "Their intentions to buy and sell at home and abroad are unknown.
China holds more than half the world's carryover stocks but uses only one-third of the world's supply. The rest of the world holds slightly lesser than half the world stocks, but uses two-thirds of the supply.
China's growing reserve stocks has rapidly tightened the supply-demand balance outside of China. Rising stocks in China, compared to declination in the rest of the world, have caused the uptrend in US cotton futures in November.
In 1997-98 and 1998-99, world stocks were balanced around 50% between China and the world. "Then, the balance quickly changed in the opposite direction," notes Anderson. "In 1999-00 and 2001-02, the share of world stocks outside of China rose rapidly. China's share declined. The "A" Index (world price) slipped from near US$0.80 in 1996-97 to almost US$0.40 by 2001-02 as global stocks became plentiful."
Given that current world stocks are relatively tight, the price rally is a signal that the world needs more cotton acreage planted this spring.
China already has a surplus of more than a year's use in the country.
"It is a high risk situation as the price stays above US$0.85 based on December 2013 futures," cautions Anderson. "China could quickly change cotton policy. Weather conditions in cotton producing countries might turn favourable. Price may drop US$0.10 per pound in a few weeks.
"Producers should have a plan to set a floor on a reasonable amount of their cotton in the mid-80 cent level," he recommends. "Put options and option spreads can be used and still benefit from higher prices later."
China's growing stocks have helped boost the 2012-13 market year's projections for US exports, from 11.6 million bales in October 2012, to 12.75 million bales in March 2013, the largest amount in two seasons.
A change in the Chinese policy could quickly affect prices.
During 2012, USDA projects a US average farm price of US$0.73, from US$0.70.