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Lower cotton price forecast released

24 Jan '09
2 min read

Based on current supply and demand projections, as well as the Secretariat's understanding of the effects of Chinese policies on trade, the Secretariat has reduced the forecast of the season-average Cotlook A Index in 2008/09 from 68 U.S. cents per pound and a 95% confidence interval ranging from 61 to 74 U.S. cents per pound (as of January 2, 2009), to 61 U.S. cents per pound and a 95% confidence interval ranging from 55 to 67 cents per pound (as of January 21, 2009) (1)*.

The main variable in the ICAC Price Model is the stocks-to-mill-use ratio (SMU) in the World-less-China (Mainland). The Secretariat is forecasting an increase of the SMU in the World-less China (Mainland) (2)* from 58% in 2007/08 to 60% in 2008/09.

The ICAC Price Model uses a dummy variable to distinguish between periods of substantial government intervention in China (Mainland) and periods of market-driven Chinese supply and demand responses.

This dummy variable interacts with two variables: the lagged change in the SMU in China (Mainland), used in periods of market-driven responses; and the current change in Chinese net imports, used in periods of substantial government intervention.

Given that (1) state reserves in China (Mainland) as of January 14 amounted to 1.8 million tons and represented 23% of projected domestic production and 19% of projected domestic consumption in 2008/09, and that (2) the current procurement target is 2.72 million tons, the Secretariat understands that the magnitude of the government intervention in China (Mainland) is substantial.

Therefore, the value of the dummy variable in 2008/09 has been set to measure the effects of the projected change in Chinese net imports on the A Index.

The International Cotton Advisory Committee is an association of governments of cotton producing and consuming countries.

1*) This price forecast does not take into account expected trends in competing commodity prices, speculation, and exchange rates.
2*) See “The New ICAC Cotton Price Forecasting Model,” Cotton: Review of the World Situation, Vol. 60 No. 6, July-August 2007.

International Cotton Advisory Committee

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