The Cotton Supply and Demand Variables

Date Posted: 01 Jul, 2013

The Cotlook A Index rose to 96.65 cents per pound around mid-June 2013 before receding to the low 90s cents level towards the end of the month.  On June 12th, the USDA increased 2012/13 U.S. export estimate to 3 million tons due to continued strong sales to China, and lowered the estimate of 2013/14 U.S. production to 2.9 million tons due to drought in the southwest. The Cotlook A Index rose 2.90 cents per pound the following day.  A week later, the Federal Reserve’s signal that it could start scaling back its huge economic stimulus program later this year triggered only a modest drop of 1.75 cents per pound in the Cotlook A Index

China’s national cotton reserve is estimated at close to 9 million tons as of the end of June, and the reserve may be down to 8 million tons by the end of July. Purchases into the reserve will resume in September as the 2013/14 harvest begins.
 
In May the International Monetary Fund lowered its forecast for China’s growth to 7.75% this year.  The new administration in China has initiated a series of reforms designed to open up the economy to private investment and speed up urbanization which will likely accelerate the reduction of cotton area.  In June, the People’s Bank of China stated that the government was willing to tighten monetary policy to achieve more stable economic growth. The new policy already had an immediate impact on spinners who are reducing purchases from the reserve, which requires payment upon delivery, and expanding imports with 90-day letters of credit. 
 
All in all, China’s cotton policy remains the main driver of world cotton prices.  With the recent acknowledgement of the market distortion created by its national cotton reserve programs, Chinese policymakers are already planning to experiment with a direct subsidy in Xinjiang.  At the provincial level, in an effort to stop the rapid decline of cotton planting in Hebei, cotton farmers were paid a direct subsidy in April this year.
 
Since 2010/11 world cotton production has exceeded world cotton consumption. While the 2012/13 global ending stocks are expected to be approximately split evenly between China and the rest of the world, China is projected to hold close to 60% of the global stocks by the end of 2013/14.


WORLD COTTON SUPPLY AND DISTRIBUTION
               
  2011/12 2012/13 2013/14   2011/12 2012/13 2013/14
          Changes from previous month
  Million Tons   Million Tons
               
Production 27.79 26.39 24.95   0.00 0.03 -0.14
Consumption 22.10 23.78 24.33   0.00 0.01 0.02
Imports  9.81  9.79  9.22   0.02 0.10 0.18
Exports  9.82  9.79  9.22   0.00 0.10 0.18
Ending Stocks 15.27 17.88 18.51   0.01 0.03 -0.13
               
Cotlook A Index* 1.00 88.00** 115.00**        

* The price projection for 2012/13 is based on the ending stocks/mill use ratio in the world-less-China in 2010/11 (estimate), in 2011/12 (estimate) and 2012/13 (projection), on the ratio of Chinese net imports to world imports in 2011/12 (estimate) and 2012/13 (projection), and on the average price for the first eleven months of 2012/13.
95% confidence interval: 87 to 91 cents per pound.
** The price projection for 2013/14 is based on the ending stocks/consumption ratio in the world-less-China in 2011/12 (estimate), in 2012/13 (projection) and in 2013/14 (projection), on the ratio of Chinese net imports to world imports in 2012/13 (estimate) and 2013/14 (projection), and on the price projection of 2012/13.
95% confidence interval: 101 to 148 cents per pound.


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The International Cotton Advisory Committee is an association of governments of cotton producing and consuming countries. The Secretariat of the Committee publishes information related to world cotton production, supply, demand and prices, and provides technical information on cotton production technology. Detailed statistics are found bimonthly in COTTON: Review of the World Situation, $150 per year. A monthly outlook is available on the Internet for $300 per year. Access to the weekly estimates of world cotton supply and use by the Secretariat is also available on the Internet for $460 per year.
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