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Chinese stock levels place limits on cotton price recovery in 2013

25 March 2013

The website Agrimoney.com has published assessments and a range of analysts’ views of cotton price movements in 2012 and 2013. It reports that in 2012, cotton futures prices declined by 18% as a result of a build-up of world cotton stocks. Indeed, according to Rabobank, the first half of 2013 will see the “largest ever period of oversupply”.

Nevertheless, a rebound in prices is projected in 2013, with prices rising between 6.7% (Commerzbank) and 7.7% (Rabobank) over the course of the year. Rabobank’s projections for average prices over 2013, however, are 12.3% below the average price estimate of Commerzbank, and 15.6% below the average price estimates of Morgan Stanley. Morgan Stanley analysts take the view that supply uncertainties will increasingly drive up prices in the course of 2013 (to an average of 80US cents/lb by the end of the 2012–13 season), given a likely decline of 30% in the area under cotton in Brazil and Australia.

The poor cotton prices in 2012, relative to other crops, are having an influence on the acreage under cotton cultivation, with soybean production being favoured in some areas for the 2013–14 season. Rabobank forecasts that the area of cotton harvested in 2012–13 will fall by about 6%, with a further 9% contraction in 2013–14. According to Commerzbank, this will provide “a moderate lift to prices, despite high stocks”. However, “domestic price support schemes and government purchasing in China and India will limit the extent of area downgrades in cotton crops – limiting the market's ability to force a much-needed widespread reduction in production and erosion of ending stocks.”

Taking up this point, the International Cotton Advisory Committee argues there has been “a lack of a production response to huge supplies, with output set to remain some 10% above consumption in 2012-13 – lifting stocks to the equivalent of 70% of consumption, the highest figure since the end of World War II”. ICAC maintains that it is only the Chinese government’s policy of stockpiling “some 9m tonnes of cotton for state reserves” (keeping about 25% of global cotton supplies away from commercial channels) that has prevented cotton prices from falling still further. Nevertheless, this amount of stock affects the futures price of cotton, moderating any price recovery. This being noted, according to Morgan Stanley the high domestic support price in China is increasingly encouraging industrial users to “rely more on imports”. Chinese cotton policy is therefore critical to the world cotton market price dynamic.

Cotton: Analysts’ average price projections per quarter for 2013 (US cents/lb, New York front future contract)

  Commerzbank Rabobank
Q1 75 65
Q2 75 65
Q3 77 70
Q4 80 70
Average for 2013 77 67.5

Editorial comment

In 2011, China adopted for the first time a policy of price support for growers and of rebuilding its strategic reserves, using both imported cotton and domestic production. In so doing, China placed itself at the heart of the cotton market and represents a major source of uncertainty regarding market trends in 2013, which will largely be contingent on how the country chooses to manage its state reserves.

According to the International Cotton Advisory Committee (ICAC), Chinese subsidies rose to a level of US$3.1 billion in 2011/12, some 65% of the world total: this is a significant proportion, yet to draw censure from African countries, notably the C4 group. The most recent meeting of the WTO Sub-Committee on Cotton, held on 6 December 2012, failed to mention it, emphasising instead the importance of south–south cooperation and concerns over any subsidy increases which might be contained in a new US Farm Bill.

Far from contributing to a drop in prices – historically the result of American and, to a lesser extent, European subsidies – Chinese subsidies served to limit the fall in international prices in 2012, at a time when market fundamentals saw stocks at record levels. China also signed, on the fringes of the WTO Ministerial Conference in December 2011, a cooperation agreement with the C4 countries, and is investing in textile industries in several African states, in response to their ambitions to develop the value chain.

However, Beijing's support for raw cotton has also kept production relatively high, thereby helping to maintain substantial world stocks for the coming campaign, in a context where any recovery in consumption is expected to be weak.


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