China’s huge cotton reserves continue to hang over the world fiber market like the sword of Damocles, threatening to strike down any trader who dares to try to bid up prices out of their current low levels.
But it’s not just China’s reserve policies that are causing consternation in the world’s cotton markets. China’s high internal prices are also leading more of its mills to turn to polyester, further exacerbating the “burdensome” world stock situation.
As anyone who has been following the world cotton situation knows, China has amassed more than 50 million bales in its government reserves, thus leading most market observers to conclude China will need to import less cotton, says Gary Adams, president and CEO of the National Cotton Council.
Dr. Adams told delegates attending the NCC’s annual meeting in Memphis earlier this month China is expected to import 6.2 million bales, down 900,000 bales from the amount it bought from outside China in 2014 and about 17 million to 18 million below what it brought into the country in 2011.
The lack of imports by China is limiting U.S. export potential and keeping pressure on cotton futures. But China’s internal pricing policy is also having a negative impact on cotton consumption by its own mills.
“In the current marketing year, China’s internal cotton price has dropped by approximately 50 cents per pound, but at close to $1.00, is still almost twice the level of polyester prices” said Adams. “As a result, cotton mill use is expected to show only modest growth in the current marketing year, and the outlook takes a conservative view for 2015 as well.”
Adams, who was vice president for economic and policy analysis for the NCC before succeeding Dr. Mark Lange as president and CEO, said world cotton consumption is expected to exceed production in 2015 for the first time in several years since 2009.
But the difference in projected world production of 113.2 million bales and expected mill use of 113.7 million bales “will do little to reduce global cotton stocks,” says Adams. (Global cotton stocks are forecast to total 109.8 million bales or the equivalent of nearly a year’s production.)
“While the Council’s economic outlook does not attempt to project cotton prices, it is important to review some of the factors shaping the current price situation,” said Adams. “Record levels of cotton stocks, smaller imports by China, weakness in other commodity markets and a strengthening dollar create a bearish climate for U.S. and world cotton prices.
“Based on the underlying assumptions and resulting cotton balance sheet, many of these same factors remain prevalent in the outlook for the coming year. However, recent experience has shown that market conditions can change quickly.”
One bright spot for the U.S. cotton industry concerns domestic mill use. The Economic Adjustment Assistance Program in the 2008 farm bill is continuing to spur investment in U.S. mills. Adams projects a 100,000-plus bale increase in U.S. mill cotton use bringing total use to 3.7 million bales in 2015.
Meanwhile, the U.S. remains the largest exporter of cotton with 2014 sales expected to total 10.2 million bales. Although down from 10.5 million in 2013, the current export number represents a gain in overall U.S. trade share.
The current U.S. export estimate breaks down into 9.7 million bales of upland cotton and 500,000 of Pima or extra-long-staple cotton.
“The current estimate may prove to be conservative for the 2014 marketing year as weekly export sales triggered marketing year high’s for three consecutive weeks in January,” said Adams.
Indeed, current U.S. prices, though disheartening to U.S. cotton producers, are attracting more interest from buyers, in part, due to the ability of U.S. merchants to ship large amounts of cotton in a short time span and India’s minimum support pricing regime.
J. Berrye Worsham, president and CEO of Cotton Incorporated, has reported an increase in inquiries about U.S. cotton and Cotton Incorporated’s new technologies from overseas buyers who are seeing something of a backlash against moves to more synthetics in fabric blends.
India is projected to continue as the world’s largest cotton producer and is seen as exporting 5.9 million bales in 2015. “The potential for greater exports exists if the (Indian) government chooses to be more aggressive in the pricing of cotton from reserves,” Adams noted.
In the analysis of the NCC Annual Planting Intentions survey results he presented at the annual meeting, Adams said the NCC projects 2015 U.S. cotton acreage to be 9.4 million acres, about 15 percent less than 2014.
Average abandonment and yields in line with recent trends for each state could result in 2015 Cotton Belt harvested area of 8.2 million acres and production of 14.0 million bales, with 13.3 million bales of upland and 700,000 bales of extra-long staple fiber.
He said a question mark for 2015, though, is cotton acreage outside the United States – as projections do not see other countries matching U.S. cotton producers’ 15 percent cotton area reduction.
Additional details of the 2015 Cotton Economic Outlook are on the NCC’s website at http://www.cotton.org/econ/reports/annual-outlook.cfm.