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China’s Huge Cotton Stockpile — Bullish or Bearish for Cotton Prices?

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China continues to stockpile cotton, prompting the US Department of Agriculture (USDA) to recently forecast a drop in cotton prices, as Chinese imports of the fiber also declines.

Other analysts, however, are forecasting an increase in cotton prices, citing short supplies and an unwillingness of local textile mills to buy cotton at inflated prices.

While China builds up its cotton reserve, the nation has also released cotton into its domestic market. But as a reaction against the high price of domestic cotton, Chinese textile mills are importing lower cost cotton yarn from India and Vietnam.

In May, the USDA predicted that China’s immense cotton reserve — tagged to eventually represent about half of the world’s supply — would curtail import demand next season, resulting in a 34 percent decline over the previous year, to 12 million bales.  This could result in lower cotton prices, say some analysts.

An opposite view is held by the Commonwealth Bank of Australia (CBA).

“Declining US production and tightening inventories would typically support prices,” the bank said.  Although cotton prices in the second half of 2013 are forecast to increase by 7.4 cents a pound to 78.2 cents a pound, these predictions run at less than future prices covering the same period.

Yet the bank says the future price of cotton remains “cloudy.”

“In stark contrast to the US, the global supply situation suggests prices will fall heavily in the year ahead,” said the bank. World cotton holdings are forecast to hit an all-time high of 20.2 million metric tons in the coming year, according to estimates from the bank, about a ten-month supply.

But with much of that cotton in Chinese warehouses, China’s stockpile management will influence global cotton prices in the coming months, in 2014, and perhaps even beyond the next 18 months, according to Luke Mathews, an analyst with CBA.

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