What is in this article?:
- Cotton carryover key to understanding market
- Importance of inventory data
- U.S. commodity market analysts often voice concerns when they believe that USDA grain, oilseeds and cotton inventory estimates are inconsistent with other market indicators. While some of that may be convenient cover for faulty analysis, the situations in India and China show the importance of inventory data from around the world in facilitating price discovery and aiding in government trade policy decision making.
Importance of inventory data
Total global stocks on July 31 are now estimated by FAS at a record large 66.1 million bales, up 3.8 million bales from last month estimates, and up from 50.5 million bales last year and 47.1 million bales in 2009/10. That would also be up from 60.8 million bales in 2008/09 and 61.0 million bales in 2007/08. China will hold 34.9 percent of the world stocks on July 31, up from 23.0 percent a year earlier. World stocks excluding China will be 43.0 million bales, up from 38.9 million bales a year earlier.
The U.S. Agricultural Attaché in India in a recent report said it is not clear if the ban will be removed before the 2011/12 marketing year ends. Probably about 1.0 million bales of the 3.0 million bales currently registered will be exported. Acreage is expected to be down 10 percent as cotton prices are lower after last year’s record high prices. With domestic use increasing, exports could be only 4.7 million bales in 2012/13. The Indian government has repeatedly intervened in the market for past three years and that is not likely to change as textile producers continue to seek government assistance. The Cotton Corporation of India, a government owned entity, has been directed to establish a 2.0 million bale government reserve.
Much of the price and supply confusion in the world cotton market could have been avoided with better cotton supply data from India and a more open information flow about China’s cotton reserve policy. If FAS revised estimates of beginning stocks in India are accurate, India was not as close to running out of cotton supplies and there was no need to limit exports in early March. As the number two producer and exporter of cotton accounting for over 20 percent of world trade, India cannot avoid its need to collect accurate, timely stocks data.
The same is true of China. As the number one producer, consumer and importer accounting for 49.9 percent of imports, it cannot start a national reserve policy without being clearer about its intentions so other market participants can make informed decisions. FAS noted that cotton prices have remained relatively stable in recent months as Chinese buying offset lower global spinning demand. A reasonable assumption would be that world prices will weaken as China ends its stock building program, unless final demand picks-up elsewhere. China’s stocks build-up has created an artificial market that is disappearing.
The G20 countries, including China and India, which account for almost 80 percent of world cereal production, meeting in France last November committed to increase transparency in agricultural markets. They agreed to increase the quantity and quality of information available, especially stock levels and harvest forecasts, covering wheat, corn, rice and soybeans as part of an Agriculture Market Information System database. Cotton could easily be added to that list.
U.S. commodity market analysts often voice concerns when they believe that USDA grain, oilseeds and cotton inventory estimates are inconsistent with other market indicators. While some of that may be convenient cover for faulty analysis, the situations in India and China show the importance of inventory data from around the world in facilitating price discovery and aiding in government trade policy decision making.
Ross Korves is an economic policy analyst with Truth About Trade & Technology