NY futures fall precipitously this week

13 Sep '08

5 min read

Much of the negativity in the cotton market is linked to the weak import demand from China in recent months. However, while China is sending weak signals, the numbers outside China are painting a surprisingly friendly scenario for the current season. World production outside China is estimated at 76.66 mio bales, while mill consumption outside China is pegged at 71.05 mio bales, which gives us a seasonal surplus of only 5.61 mio bales.

In other words, if China were to import just 5.61 mio bales this season, it would be enough to square the seasonal balance sheet. On the other hand, if China takes more than 5.61 mio bales, it will have to come from stocks, which as we know have only been plentiful in the United States and perhaps China itself, while other exporters have started the season with relatively small inventories.

To put this seasonal surplus of 5.61 mio bales in perspective, we had 12.1 mio bales last season, 13.1 mio bales two years ago, 16.9 mio bales in 2005/06 and 21.0 mio bales in 2004/05. As you can see, the amount that the world is able to give to China has been decreasing substantially over the last five seasons, which greatly mitigates the impact of slower import demand from the world's largest consumer. Interestingly, the reduction of this production gap is entirely due to smaller crops, because consumption outside China has been flatlined for the last five seasons.

In 2004/05, mill demand outside China was at 71.0 mio bales and while it briefly spiked to 73.3 mio bales in the 2006/07 season, it is now once again projected at 71.0 mio bales. In other words, we can hardly make the case for inflated mill consumption numbers outside China, since these numbers didn't rise when the world economy was strong, so there is no compelling reason to scale them back now that the going gets tougher.

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