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High-ending stocks may pull down Brazilian cotton prices
Jan '13
The reading of the cotton market indicates opposite scenarios for 2013. On the one hand, players expect firmer prices due to a possible supply decrease, because of the replacement of cotton area for grains. On the other hand, some agents say that high ending stocks might press down cotton quotes.

Bullish players bet on lower supply, based on the replacement of cotton for grain crops in the next season in the Northern Hemisphere. This scenario has already been observed in the Southern Hemisphere, since cotton profitability is lower compared to that of other crops. In the process, demand may continue to increase.

China’s position in this scenario will be important. China detains more than 47% of world stocks and decisions of the Chinese government to flow them will be important to evaluate if the industry in that country will need to import new batches. If China does not need to import, trades in the international market may reduce, affecting prices.

In November 2012, China imported 304 thousand cotton tons, 11.6% more than in October, but 19.7% less compared to November 2011 (data from China Cotton Association). From January to November 2012, the country imported 4.6 million tons of cotton, 79% higher in relation to the same period of 2011.

In Brazil, cotton prices may sustain in 2013, due to the smaller domestic production, good pace of exports and the industry’s need to purchase more than the half of its needs regarding 2011/12. Sales in the retail market continue firm; therefore, the higher exchange rate might favor the domestic industry.

On the other hand, bearish players say that high ending stocks might continue to affect prices. If China reduces international purchases, quotes can be even more affected.

For Brazil, considering the surplus of the last two seasons (production minus volumes registered at BBM, the amount surpasses 1.1 million tons. Therefore, the domestic demand needs to increase and/or exports need to keep the pace of the last months, accumulating more than 1 million tons in each 12 months. Despite that, for the mid-term, fundaments of the market are high.

Moreover, considering current price levels of soybean, corn and wheat, if cotton quotes drop even more, the replacement of cotton crops may be more significant, which would reduce the stock/consumption ratio and buck the trend for prices.

On the other hand, due to an increasing demand and a decreasing supply, stocks might reduce and prices may resume increasing.

Concerning the 2012/13 crop, the USDA forecasts China to reduce 53% of imports, because of high domestic stocks. As for the Chinese consumption, the USDA indicates a decrease.

The world production might total 25.45 million tons, 5.9% lower than the previous season. However, the world consumption may increase, totaling 23.18 million tons. Still, ending stocks might increase 15.1%, to 17.34 million tons. 

Center for Advanced Studies on Applied Economics (CEPEA)

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