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China Stocks Drive World Cotton Prices

By the end of 2013, China will have increased its share of global cotton stocks to 60%, according to a recent projection. This will make the country the main driver of cotton prices worldwide.

The projection, released by the International Cotton Advisory Committee, estimates that China will draw down its cotton reserve from 9 million tons to 8 million tons by the end of July. China should then resume regular cotton purchases to bolster its reserve in the 2013/14 harvest season.

The US Department of Agriculture increased its 2012/13 export estimate to 3 million tons last month, anticipating further strong sales to China. At the same time, 2013/14 production is predicted to fall to 2.9 million tons, as drought continues to impact the southwest.

The Cotlook A Index was up to 96.65 cents per pound in mid-June, but has been hovering in the low 90s since then. The NYMXE price is 86.22 cents per pound for the October contract, with a spot price of 81.84 cents.

China will also see declining production, according to ICAC estimates. The country is expected to move land out of cotton cultivation, as government reforms aimed at opening the economy speed urbanization and growth.

The People’s Bank of China is moving to tighten monetary policy at the same time, with the aim of shrinking asset bubbles and delivering a more sustainable growth rate. This is affecting spinners, who are slowing purchases from China’s cotton reserve, which demands payment on delivery, and switching to imports, which can be paid with 90-day letters of credit.

The cotton reserve program has a distorting influence on the market, which has been acknowledged by Chinese policymakers. The aim of the program is to subsidize cotton plantings, and the government is currently experimenting with a direct subsidy to farmers in Xinjiang. Farmers already receive a direct subsidy in Hebei.

World cotton production outstripped consumption in 2010/11, according to the ICAC. Half the stock increases in 2012/13 will flow to China, with the rest being distributed around the world.