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Cotton Incorporated: Prices Outside China Flat to Lower; CC Index Lower

Cotton Incorporated: Prices Outside China Flat to Lower; CC Index Lower

11 April 2014

GLOBAL - Prices outside China were flat to lower last month, while the CC Index decreased in early April.

Cotton IncDespite some volatility in late March, prices for the May New York futures contract have been trading at levels around 90 cents/lb recently, nearly equal to values one month ago.

New York December futures have held to values around 80 cents/lb over the past month. 

The A Index has decreased slightly in early April, falling from the levels near 98 cents/lb experienced in most of March to below 95 cents/lb.

The CC Index recently decreased the most since the onset of the 2012/13 crop year, dropping 3.8% with the decrease in the government-mandated reserve auction price on April 1st (from 19,400 to 18,660 RMB/ton or from 142 to 137 cents/lb).

Spot rates for India's Shankar-6 variety have been stable in both international (near 89 cents/lb) and domestic terms (near 42,000 INR/candy). Pakistani spot rates have been stable recently at levels near 82 cents/lb (6,650 PRK/maund).

SUPPLY, DEMAND & TRADE

In the USDA's latest monthly report, there were minor changes to global production and consumption figures. The world harvest estimate decreased only 60,000 bales, from 116.7 to 116.6 million. Country-level revisions were for the U.S. (-320,000 bales, to 12.8 million), Brazil (+100,000 bales, to 7.5 million), and Burkina Faso (+100,000 bale, to 1.2 million).

The world consumption figure increased 240,000 bales, from 109.2 million to 109.5 million. Among the largest country-level changes to mill-use were those for India (-350,000 bales, to 23.0 million) and Pakistan (+500,000 bales, to 11.5 million).

With an assumption of additional import quota being released in China, the 2013/14 Chinese import forecast rose 1.0 million bales (to 12.0 million). Import estimates for Pakistan (+500,000 bales, to 2.5 million) and Vietnam (+100,000 bales, to 3.0 million) also increased, while projections were lowered for India (-350,000 bales, to 750,000 bales) and Indonesia (-100,000 bales, to 2.7 million). Export forecasts for Australia (+700,000 bales, to 4.5 million), India (+500,000 bales, to 8.0 million), and Burkina Faso (+100,000 bales, to 1.2 million) were all revised higher.

No changes were made to the U.S. export figure, but the reduction in the U.S. crop estimate caused U.S. ending stocks to decrease 320,000 bales (to 2.5 million). At its current level, U.S. ending stocks are expected to reach their lowest level since 1990/91. Since the U.S. is the world's largest exporter, tightness in U.S. supply could support prices until the 2014/15 harvest becomes available.

Next month's report features the USDA's first complete set of estimates for the upcoming crop year and should provide an indication of how U.S.stocks, as well as stocks in other countries outside of China, could be re-built with the 2014/15 harvest. The extent that stocks in the U.S. and other countries increase should influence how low world prices may decrease next crop year.

PRICE OUTLOOK

The Chinese government made a series of revisions to cotton policy over the past month. Most significant were the changes declared for the way the government supports its cotton growers. It was announced that the system based on guaranteed prices enforced by reserve system purchases will be eliminated.

Replacing this system is a new program based on target prices. Under the new support structure, gins will report prices for the lint they sell in order to establish an average market price. When this market price is below the target, the government compensates growers for the difference. An important element of the new system is it facilitates the flow of fiber from field to mill and allows for market prices below guaranteed level.

The initial target price was set at 19,800 RMB/ton (145 cents/lb), which is about 3% below the 20,400 RMB/ton guaranteed under the reserve-based system in 2012/13 and 2013/14. However, since the subsidies are paid directly to producers, it has been reported that certain growers may enjoy higher incomes under the new system.

Details specifying the geographic coverage of the new system have not been released, but it appears that subsidies will not be universal and will initially only be offered in Xinjiang province. If no support is offered to other growing regions, steep declines in acreage could be expected in those areas.

In addition to the reforms announced with respect to production, changes were also made to the auctions that sell cotton from reserves. The price for cotton sold was lowered from 18,000 to 17,250 RMB/ton (from 132 to 126 cents/lb at current exchange rates). In addition to the change in prices, incentives to move cotton from reserves were created.

One of these is a ratio tying newly granted import quota to mill purchases from reserves, which allow one ton of sliding-scale quota to be issued for every four tons of reserves purchased. With reserve prices above international rates, this ratio allows mills some opportunity to lower average costs while encouraging the movement of cotton out of government warehouses.

By facilitating a more direct flow of cotton from Chinese growers to Chinese mills and by incentivizing purchases from reserves, recent reforms appear to emphasize increased use of domestically available supply. With more domestic cotton available, the question of how much less China might import in coming crop years is likely the most important demand-related uncertainty for the global cotton market.

From the supply-side, there are significant weather-related questions, particularly how the on-going drought in the southwestern U.S. may result in abandonment and yield loss. In combination, these two issues will affect the extent that stocks outside of China are re-built in the coming crop year, and therefore how far global cotton prices could decrease.

Further Reading

You can view Cotton Incorporated's full economic outlook by clicking here.



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