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Decline in cotton stocks could support prices

26 May 2013

In March 2013, the International Cotton Advisory Committee (ICAC) projected a decline in global cotton inventories for next season, based on a reported slowdown in stockbuilding by China. However, by April 2013 the ICAC had reversed this prognosis, reducing its forecast of a decline in world cotton stocks of 1.2 million tonnes over 2013–14 to a decline of 250,000 tonnes, following an upward revision in the production figure to 23.5 million tonnes. This represented a decline in production of only 9.8%, rather than the 14% initially projected. This is still significantly more than the 2.9% decline projected by the USDA.

According to reports carried on Agrimoney.com, “a jump of some 20% in New York cotton prices so far is viewed as prompting many farmers to reconsider plans for a huge scaleback in plantings of the fibre, notably in the US itself, the top exporter.” Nevertheless, “the ICAC, in its first forecast for cotton prices in 2013-14, forecast them averaging 118.0 cents per pound over the season.” This is higher than Rabobank’s forecasts in March of a rise in cotton prices from 80 US c/lb to 85 c/lb by the fourth quarter of 2013, but in line with the rising trend. This would “represent a 31% jump from the 90.0 cents per pound expected for [the 2012-13] season” and would be “the highest [forecast value] since the 164 cents a pound averaged in 2010-11, the season in which both the Cotlook A and futures set records above 200 cents per pound”.

These ICAC forecasts are based on “projections for cotton stocks held outside China”.

Editorial comment

The rise in world cotton prices in the first quarter of 2013 and an improvement in returns relative to soybeans have certainly led American producers to plant more cotton. At the end of March, USDA was forecasting a planted area of 10 million hectares in 2013/14, nonetheless a 19 % decrease over 2012/13. These figures could yet be revised upwards. As far as output is concerned, ICAC forecasts a rise of 300,000 tonnes to a total of 3.7 million tonnes. Closing stocks in 2013/14 are consequently expected to lie close to the very high levels of 2012/13. This is a result of Chinese policy. To build up its stocks, China has been buying cotton from its domestic growers at above-market rates, and on the international market, but this has also served to diminish supply and drive up prices. Investment activity, too, has accentuated these price increases. Without China's intervention, market fundamentals suggest that prices should range between 60 and 70 US c/lb. The high prices have benefited African nations, the majority of whom export almost all of their output as raw cotton. Some of the largest producers, like Burkina Faso and Mali, have announced higher production targets, even though sowing time is still several months away, and total output for 2012/13 showed a substantial increase. Farm-gate prices have been revised slightly downwards for 2013/14. However, they remain high, showing a decrease of only 5 FCFA/kg. 

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