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Clouds of Uncertainty

By John Johnson

China, the world’s largest cotton producer, consumer and importer, has long been a dominant force in the global market, perhaps even more so this marketing year, and it is commanding the attention of virtually all traders and analysts under clouds of uncertainty. A procurement program for its strategic reserves the past three years has resulted in China now owning almost 60 percent of world cotton stocks, giving the Asian country tremendous market manipulating potential.

Purchasing cotton for its reserves provides price support for Chinese farmers; however, the price it pays the farmers is well above world prices. It is the equivalent of almost $1.50 per pound, depending on exchange rates. Likewise, the size of the strategic reserve also has supported prices elsewhere in the world this marketing year by keeping carryover stocks outside of China relatively tight. For example, the USDA supply and demand report released Dec. 10 estimated U.S. ending stocks at 3.0 million bales, a 21 percent stocks-to-use ratio.

While China’s cotton farmers have benefited from the prices they receive from their government, profitability for textile mills there has suffered. Consequently, the mills have sought to import cotton or cotton yarn from other countries such as India and the United States. In fact, China regularly appears among the top three purchasers in USDA’s weekly export sales report despite that country’s use of import quotas and sliding scale tariffs to increase the cost of imported cotton.

A significant development this season was China’s announcement that it would begin auctioning cotton from the strategic reserves. It created uncertainty and nervousness among traders around the world who feared huge volumes would be dumped on the market, but that has not been the case thus far. The auctions have been orderly but have fallen short of goals, possibly because the cotton being sold has been from the 2011-12 season which is unappealing to mills concerned about loss of fiber quality and weight. Meanwhile, purchases of new-crop cotton continue to be added to the reserves but at a slower rate than last year. Purchases this year totaled almost 13.8 million bales as of Dec. 8, about 10 percent less than this time last year due to higher quality standards.

In recent weeks, talk among the trade has focused on a shift in China’s cotton policy to lessen the burden created by the massive strategic reserves. The adoption of a target price system has been mentioned along with insurance incentives or direct payments to farmers. Some observers are concerned that the policy change could result in lower cotton prices in China and reduce demand for imported cotton. On the other hand, if farmers there receive less for their cotton, will they switch to more lucrative crops and reduce overall cotton output? Current estimates are that China’s acreage will decline by at least 10 percent.

China also pays its growers a subsidy to plant high quality cotton varieties as well as subsidies to transport cotton, according to one report. Meanwhile, U.S. farm policy appears to be headed in the opposite direction as a House and Senate Conference Committee works on details for a new, long-term farm bill. Some economists believe the reduced support could leave U.S. farmers vulnerable to low prices.

Eventually, answers will be forthcoming regarding farm policy in China and the United States, and analysts and farmers will have a clearer picture of 2014 and beyond as clouds of uncertainty dissipate.

USDA Surprises Some Market Analysts with Lower Estimate for U.S. Cotton Production

The U.S. Department of Agriculture caught some cotton analysts and traders a bit off guard by raising its estimate of 2013-14 U.S. production by 118,000 bales. It was somewhat anticipated that the production number would be lowered. Despite the surprise, the monthly supply and demand report had little impact on the market when it was released Jan. 10.

The U.S. cotton crop was pegged at 13.20 million bales in the latest report compared to December’s estimate of 13.07 million. Domestic consumption and ending stocks were unchanged.

Overall, world production is now pegged at 117.81 million bales, up almost one million last month, and world consumption is now projected to be 109.5 million bales, 180,000 bales less than estimated in December.

The Texas cotton crop is now pegged at 4.3 million bales, down 700,000 from last year’s crop. The High Plains region accounted for 2.67 million bales in this year’s estimate, and the Rolling Plains crop was estimated at 780,000 bales. The Oklahoma crop was estimated to be 190,000 bales, and Kansas production was pegged at 39,000 bales.