May 5, 2012

 

 

Over the past seven months, China bought nearly one million tonnes of US cotton, keeping prices of the fiber afloat on the global market, and analysts say the buying spree isn't over.

 

The purchases, totalling more than a quarter of estimated US production for 2011-12, stopped March 31, and traders thought cotton prices on global markets would start to slide. But China still needs millions of tonnes of cotton to feed its mills, which produce 40% of the world's cotton goods, analysts said. And with global prices cheaper than domestic, Chinese mills will be agitating for more imports, analysts said.

 

"The mills in China will be looking to import cheaper cotton," said Sharon Johnson Crump, senior analyst at Penson Futures in Atlanta, which will mean "less cotton available on the world market overall."

 

As a result, some traders are positioning themselves for a rise in cotton prices, possibly back to US$1 a pound, if the Chinese government increases the amount of cotton mills are allowed to import. On Friday (Apr 27), cotton for May delivery settled 1.2% lower, at US$0.8923 a pound, on the ICE Futures US exchange.

 

"I think the domestic demand [in China] will cause the price to go up," said one Tennessee trader who is betting cotton prices will rise. "I think there's a shortage of quality cotton that's deliverable" for futures contracts due to how much high-quality, upland-variety cotton China has purchased from the US, he said.

 

The trader said he plans to remain bullish on cotton prices for the next few months. The harvests are done, so the market can only draw from current supplies until the new crop is harvested later this year, he said.

 

China dipped a toe back into the market in the week ended April 19. The USDA reported that China bought 21,800 short tonnes of cotton. The last time China bought a comparable amount was March 22, just before the stockpiling programme ended, when it bought almost 25,000 tonnes.

 

Importing cotton from the global market makes sense for Chinese mills because domestic prices are high. The China National Cotton Reserves Corp. is paying CNY21,826 or US$3,464, a tonne for fiber from domestic producers to build up its reserves, but it only buys about 40% of the output. The rest is sold on the domestic market, where prices closed at US$3,698 a tonne Friday on the Zhengzhou Commodity Exchange, about double what cotton is trading for on the ICE exchange.

 

The inflated prices guarantee a floor for farmers and are meant to encourage planting of the fiber, but the government's meddling in the market hasn't satisfied them. A recent survey by the China Cotton Association said farmers likely will reduce their planting areas by almost 17% this year because costs for labour, fertiliser and seeds are rising while domestic prices, though high, have eased from last year.

 

Chinese mills in need of cotton and trying to avoid high domestic prices have two options, both of which depend on the actions of the Chinese government. The mills are limited to a total import quota of 985,466 tonnes, which is separate from what the government imports for reserves, but domestic cotton traders say they expect the government to issue additional quotas when the cotton planting is complete at the end of April. The other option is that the government releases some of its reserves, as it did last year when prices in the US hit a record of US$2.27 a pound.

 

China bought cotton from the global market from September 8-March 31 to replenish those stocks. In 2011, China's amount of cotton left over at the end of the year was down 24% from 2010 and nearly 50% from 2009.

 

Analysts say it is unlikely China would want to release its reserve stocks into the market now because global prices are lower than what it paid for the fiber. Moreover, a release from reserves would drive down domestic prices, upsetting farmers. Releasing the reserves also would upset mills, as the price for cotton on the global market is much cheaper.