NY Cotton futures continue to move sideways this week

21 Mar '14

5 min read

Since China’s own production gap amounted to just 8.5 million bales over these three seasons, it saw its stocks grow from 10.6 to 57.8 million bales since 2010/11. Additionally, China has supported ROW mill use by moving some of its factories outside its borders and by boosting yarn imports, mainly from India, Pakistan and Vietnam, to nearly 10 million bales per annum.

Unfortunately we believe that the ROW won’t be able to count on China’s support for much longer. Let’s assume that China’s production next season were to drop by around 15% or some 5 million bales to just 27 million bales and that mill use were to remain at the current 35.5 million bales. This would result in a seasonal production gap of 8.5 million bales.

Therefore, in order to neither increase nor decrease its stockpile, China could import no more than 8.5 million bales. Since early projections point to a ROW production surplus of around 13 million bales, ROW ending stocks would therefore grow by 4.5 million bales to 43.4 million bales under this scenario. By comparison, over the last 10 seasons ROW ending stocks ranged from 32.8 to 42.2 million bales.

The above scenario is based on a ‘status quo’ approach, assuming that Chinese stocks would remain unchanged. However, since China will most likely want to see its stockpile decline over the coming years, this can only be achieved by a) lowering production even further, b) boosting mill use, c) lowering imports or d) a combination of the above.

While lowering production would be the most desirable option from a ROW point of view, we doubt that China’s output is going to fall precipitously next season. In order to increase mill use, China would probably have to curb yarn imports and force local prices a lot lower, both of which would not be friendly for ROW prices. But most negative from a ROW point of view would be a drastic drop in imports, possibly to no more than the mandatory Tariff Rate Quota (TRQ) of around 4.1 million bales.

So where do we go from here? While May and July have the potential to act like loose cannons over the next couple of months, the longer-term view doesn’t look quite as supportive in our opinion. Some of this sea change coming out of China may already be discounted by the market, hence the big inversion between July and December, but if China ultimately decides to lower its stockpile and if ROW production meets current expectations, new crop prices may struggle to keep their current value.

Plexus Cotton Limited

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