World cotton stocks to rebuild as use lags - USDA

by Agrimoney.com

Cotton consumption will in 2011-12, for a second successive season, break with history and fall behind world economic growth, US officials forecast, as a broker cautioned that the fibre's rally may be past its peak.

Global cotton use will expand by 3.0% in 2011-12, lagging economic growth, which is expected to reach 4-5% in 2012 for a third successive calendar year, US Department of Agriculture economist James Johnson said.

Traditionally, the figures have moved in step, a reflection of cotton's use in clothing, largely an item of choice, rather than in food, like other farm commodities.

Indeed, in the five years before the world recession the world economy expanded by 4.6% a year, and cotton consumption by 4.7%.

However, next season, the tie will be broken by mills' enthusiasm to rebuild inventories depleted by the shortfall in supplies this season, and a slowdown in clothing demand as soaring cotton prices, which hit a record earlier this month, feed through to retailers.

Stocks to recover 

"Consumption levels will continue to be affected by supply limitations, a lagged response to the current record prices, and industry desire to hold more stocks," USDA economist James Johnson said.

USDA view of world cotton, 2011-12 and (year-on-year change) Production: 127.5m bales, (+10.6%) Consumption: 120.0m bales, (+3.0%) Exports/imports: 42.0m bales, (+10.2%) Year-end stocks: 50.3m bales, (+17.5%) Stocks-to-use: 41.9%, (+5.2 points) Cotlook A: 135 cents per pound, (-23%)

High prices will also provoke a continued shift demand to polyester, which is roughly twice as cheap compared with cotton as it was five years ago.

The consumption lag, coupled with the prospect of a cotton values inspiring a strong rebound in production, will enable world inventories to jump by 17.5% to 50.3m bales.

At this level, stocks would represent 42% of consumption, a large rise on this season's 32% figure, but "low relative to the recent average", Mr Johnson told the USDA Outlook Forum.

The stocks-to-use ratio, a widely used metric for gauging the availability of a crop and therefore its pricing potential, suggested a drop in values, as measured by the Cotlook A index from an average of 175 cents a pound in 2010-11 to 1.35 cents a pound next season.

The index stood at 209.30 cents a pound on Friday, down 6.45 cents on the day, and below a record high hit earlier this month.

Highs behind us? 

And cotton prices may fail to revisit their highs, if falling prices encourage farmers, who have been stockpiling the fibre in the hope of selling out at the top, to cash in, Rabobank analysts said.

"The possibility exists that the declining values actually encourage selling by producers who are worried about further price weakness," the bank said.

"A surge in selling along with likely bullish indications of large northern hemisphere plantings may mean that, without a disruption in production, values may find it difficult to revisit the recent highs."

Nonetheless, the fibre was set to find support from bargain-hunting speculators, and from trade buyers, "once it looks like prices have bottomed out".

And with supplies thin until the next harvests are in the bag, "volatility and sharp moves are likely to continue over the coming months".

In New York, cotton for March delivery gained 2.2% to 185.34 cents a pound, looking for its first rise in five trading days.

The better-traded May lot was 1.9% up at 180.52 cents a pound.

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