July 31, 2012

 

China's cotton reserve policy to rule in 2012-13

 

 

Beginning August 1, China's policy of buying and stashing large amounts of cotton in state reserves will dominate the market in the 2012-13 marketing season.

 

Allenberg Cotton Co President and CEO Joe Nicosia told on Friday (July 27) the Ag Market network's annual radio programme from New York that "everything (in the cotton market) is dependent on the Chinese reserve policy."

 

"China's cotton policy is supporting prices globally. As long as China continues to build its reserves, the cotton market will be protected from its surplus," he said. Allenberg, the wholly owned unit of trading giant Louis Dreyfus, is the world's biggest cotton merchant and trader.

 

The USDA forecast world cotton ending stocks in 2012-13 (July/August) at 72.39 million (480-pound) bales, down slightly from the record 74.51 million it forecast in its June report. The USDA's next update is due on August 10.

 

China's ending stocks are seen at 31.8 million bales and now account for 44% of the world total. The "primary beneficiary" of Beijing's cotton purchases has been the American farmer, Nicosia explained.

 

Nicosia said a drive to put in place a new world cotton contract to supplant or replace the No. two cotton contract by ICE Futures US will get underway. But he poured cold water on its chances of replacing the current cotton contract by ICE.

 

"I think the No. two (cotton contract) will still be the flagship (for the cotton market)," he said. "I think it's going to be difficult to get that (a new world cotton contract) to work."

 

Critics of the current cotton contract feel it is too restrictive because the only cotton that can be delivered is US cotton. They said the market needs a contract which would have more delivery points to reflect the world-wide nature of cotton cultivation and its market.

 

Looking ahead to the 2013-14 season, Nicosia said surging corn and soy prices would lead to large-scale switching by American farmers in 2013 to grains and away from cotton. Cotton farmers in Brazil, a major producer of soy, would also be prime candidates to get out of cotton.

 

USDA pegged US cotton sowings in 2012 at 12.64 million acres (5.1 million hectares), down from the 14.72 million sown in 2011. Nicosia said US farmers may go back the level of plantings in 2009, when only 9.15 million acres were sown, if grain prices stay this high.