While China’s huge reserve of cotton is applying negative pressure to cotton prices, world yarn production outside of China is pushing them higher, say market analysts speaking at the Ag Market Network’s January conference call. The panel spoke about cotton fundamentals following USDA’s Jan. 11 World Agricultural Supply and Demand Estimates.

World cotton fundamentals for 2012-13 were bearish on the surface, with increasing world production and lower consumption. Also bearish were estimated world ending stocks, which reached an all-time high of 82 million bales, up 2 million from last month. USDA estimated world production at around 119 million bales and consumption at 106 million bales.

China is hanging on to about half of the world’s ending stocks, noted O.A. Cleveland, professor emeritus, Mississippi State University, and no one is exactly sure of how it plans to dispose of them.

“The Chinese have bought something around 25 million to 26 million bales directly from its cotton producers. They’re paying their cotton farmers directly for their cotton.”

It’s a policy that Chinese decision makers are starting to question, said Cleveland, noting that the government’s investment in the pile of cotton is about $32 billion.

Cleveland says that the Chinese “are finally beginning to reduce their stocks, selling them to the mills at somewhere around a $1.35 to $1.38 a pound.”

However, Chinese textile mills can import cotton for about $1.19, which puts them at a competitive disadvantage if they have to turn to domestic cotton. “As a consequence, the Chinese textile industry is importing yarn rather than buying from spinners,” Cleveland said.

This has been a positive for U.S. exports, Cleveland said. “The yarn is coming from other Asian countries, including India and Pakistan. While Chinese consumption is down a little bit from last year in the spinning mills, yarn imports are up considerably. This implies exports from the United States to the countries that sell yarn to the Chinese. Large volumes of yarn have led to a significant increase in demand for U.S. cotton.”

This was reflected in USDA increasing U.S. exports from 11.8 million bales to 12.2 million bales for 2012-13, a 400,000 bales increase in just one month. “Consumption is an extremely bright light because it’s coming completely from exports, which were supposed to be lagging.

“I would suggest that USDA has another 400,000 bales to 600,000 bales to go,” Cleveland said. “Exports will probably end up somewhere around 12.6 million to 12.8 million bales. That’s a huge jump from where we are right now. Most countries are fairly uncovered with respect to their mill needs.”