Spotlight on...Global cotton stocks seen piling even higher
The latest projections from the US government suggest global cotton stockpiles in the current season will be even higher than forecast just a month ago - with the expected rise putting even more downward pressure on world prices.
In its monthly cotton crop report released this week, the US Department of Agriculture (USDA) increased its estimate for world ending stocks to a record 76.5m bales in the 2012/13 season, which began on 1 August. This is up 9.5% from a year ago, and nearly 2m bales higher than last month's forecast of 74.7m bales.
The gains are attributed to a combination of the weak global economy, competition from manmade fibres, low levels of consumption, and imports by China.
Global cotton production is set to decline 8% from the previous season to 114.0m bales as farmers switch to other crops yielding higher demand and prices.
USDA estimates also see cotton consumption by the world's mills down 600,000 bales from last month to 107.6m bales in 2012/13. But while this represents a rise of 3% on last season, it still remains the second lowest in nearly a decade, USDA warns.
With calculations suggesting world ending stocks will rise as production outpaces consumption, this would be the third year in a row in which global mill use is less than global production.
Driving much of the decline in world consumption for the past several years has been contraction in China, which alone accounts for 35% of the total. The country is expected to consume 38.0m bales in 2012/13, 2.6% below last year and the lowest in nearly a decade, according to the USDA report.
China's price support and national reserve policies continue to erode margins for domestic cotton spinners, resulting in a loss of market share. However, the country's ending stocks are expected to rise 16% to 35.5m bales, accounting for nearly half of global stocks.
Lower export orders make an impact
In its review of the figures, Cotton Incorporated suggests one potential reason for the decline in Chinese mill-use in recent years is reduced export orders for finished apparel goods from developed economies like the European Union and the US, where the combination of slowing economic growth and rising apparel prices have lowered import volumes.
Indeed, for the 12-month period ending in July 2012, total US apparel imports were down 6.4% year-over-year in volume terms.
In addition to these macroeconomic factors, Chinese government policies may also be impacting consumption.
A combination of import quotas that regulate the amount of cotton fibre that can be imported, as well as a price guarantee to domestic cotton farmers, means many Chinese mills pay higher prices than their international competitors.
On 10 September China began making purchases for government reserves, guaranteeing a minimum price to Chinese farmers for the 2012/13 crop year. At RMB20,400 per ton (3% higher than the last crop year), the guaranteed price is equivalent to $1.46 per pound at current exchange rates.
To mitigate some of the price differential, the Chinese government also began selling from reserves in September. Mills could purchase the equivalent of one month's consumption from the government at a price of RMB18,500 per ton ($1.33 per pound). Although this represents a discount relative to the price guaranteed to growers, it comes in at a significant premium to prices traded on the Cotlook A Index at near $0.85 per pound.
One consequence of the higher fibre prices faced by Chinese spinning mills has been a higher volume of cotton yarn imports, which are not subject to quota, Cotton Incorporated says. In July, the latest month with data available, China's cotton yarn imports were the highest on record.
Another potential consequence of high prices in the world's largest cotton consuming country could be a loss in cotton's market share as firms switch to alternative fibres.
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