Monday, July 15, 2013

Cotton prices revive - but China remains a threat

by James Moore

Cotton futures have seen a light relief rally into the end of the week - however, sentiment among some brokers remains negative, with Rabobank cautioning over a tumble in imports by China.

The USDA on Thursday, in its benchmark Wasde crop report, raised its estimate for world cotton stocks at the close of 2013-14 by 1.8m bales to a record 94.34m bales, raising its forecast for inventories at the end of 2012-13 too.

The forecast reflected a higher forecast for world production, reflecting increased hopes for India, following the strong start to the monsoon � which US farm officials in New Delhi said in a report earlier this week was not so positive for cotton output, in potentially encouraging growers to switch to more thirsty crops.

Furthermore, the USDA trimmed its forecast for world consumption, with the downgrade focused on Pakistan.

'Futures can work lower'

New York cotton futures for December, while tumbling 2.4% on Thursday, managed to recoup some ground on Friday, adding 0.4% to close at 85.08 cents a pound.

Nonetheless, that may not be the end of cotton's price decline.

"It is possible that futures can work lower again as demand has turned soft," said Jack Scoville of Price Futures, if adding that "production and weather might be more important in the short term".

Still, "weather for cotton appears good in India, Pakistan, and China," he said.

China concerns

And Rabobank, terming the UDSA data revisions "bearish", warned of a potentially significant headwind for prices, in an even sharper drop in Chinese imports in 2013-14 than the 45% to 11m bales that the USDA has factored in.

The USDA had been "muted" in the Wasde "on China's balance sheet, which was unchanged month on month," Rabobank said.

"Whilst it is too early to anticipate the Chinese government's import appetite in 2013-14," the bank proposed a "conservative forecast of China's import demand of 7m bales".

Furthermore, the bank forecast, at 14m bales, a bigger US crop than the USDA, forecasting that rate of abandonment of crops in important south west growing areas will "decline on improving crop conditions".

China policy change?

Other commentators cautious over cotton price prospects include Judith Ganes, the veteran soft commodities analyst, who warned over the threat posed by a potential change by China to its cotton market support programme, which guarantees a minimum price to farmers.

This has left China looking at inventories of 58.9m bales at the close of 2013-14 � some 60% of the world total - on USDA forecasts.

"As long as this cotton is just sitting in warehouse, the market will be underpinned," Ms Ganes, of Ganes Chase Consulting, said.

"Pressure is mounting, though, for a change in policy.

"The challenges China is facing economically may force this decision sooner because a reduction in domestic mill demand, means the working stock represents that much more supply and import needs are apt to shrink."

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