What is in this article?:
- China a big player in global cotton market
- Drop in U.S. acreage
- If China moves 15 million to 18 million bales of domestic and imported cotton into its strategic reserve, which appears more and more likely, it could create a synthetic tightness which could be positive to prices.
If China moves 15 million to 18 million bales of domestic and imported cotton into its strategic reserve, which appears more and more likely, it could create a synthetic tightness which could be positive to prices, according to J. Michael Quinn, Carolina Cotton Growers Cooperative, Garner, N.C.
But as is the case with the cotton market in recent months, if Europe continues to slip into recessionary waters, cotton consumption and cotton prices could suffer.
Speaking at the 2012 Beltwide Cotton Conferences in Orlando, Fla., Quinn noted that nearly all of the increase in U.S. export sales in recent months have been to China, driven by Chinese government purchases. “Total sales of U.S. cotton for the reserves are now approximately 2.4 million bales. This is significant.”
When cotton is moved into reserves, “it’s technically taken out of play, much like when India banned its exports and took 1 million to 2 million bales out of play that the market could have used.”
On the bearish side, USDA recently reduced world cotton consumption by 3 million bales. “This is concerning and is accurately reflects the current economic conditions and the uncertainty out there in the world.”
Another bearish number are world ending stocks of approximately 57.7 million bales, an increase of 12.2 million bales over the previous year, and a stocks-to-use ratio of 51.8 percent. “Prices have already made a drastic drop already, so the pricing may already be in the marketplace,” Quinn said.
Quinn says Chinese purchase for its strategic reserve could offset all of the impact of the increase in global ending stocks. “If that turns out to be true, and that’s the direction we’re heading in, that’s supportive to prices. It’s something to keep a very close eye on. You could end up with a synthetic tightness of world ending stocks.”
The cotton market will also be watching the debt crisis in Europe, noted Quinn. An analysis by Pacific Investment Management Co., indicates that Europe will be in a recession in 2012. “If that comes to fruition, that is certainly going to slow things down. Uncertainty and volatility in Europe has a material influence on global markets.”
Another factor to watch are oil prices spiked by “saber rattling” in the Strait of Hormuz, the only sea passage for large areas of the petroleum-exporting Person Gulf, which could push gasoline prices higher, especially if Iran is successful in closing off oil shipments. “But I personally don’t think that will be the case. The commander of the U.S. Fifth Fleet has sent the message that the strait would stay open. Enough said.”
Quinn says current cotton prices “imply lower international cotton acreage in 2012-13. “China has indicated that they will reduce plantings 8 percent to 9 percent over the next year. We’re looking at world numbers dropping 7 percent to 8 percent.