Since China’s announcement in April that it would lower the starting auction price of cotton, sales from the country’s reserve have increased and domestic cotton prices have fallen. As a result, world cotton production is forecast to decline.
According to a report released by the International Cotton Advisory Committee (ICAC) Thursday, the Type 328 China Cotton Index–a daily index of prices for domestic cotton offered to mills in China–fell from this season’s nine-month average of 144 cents per pound to about 129 cents per pound as of the end of April.
China’s mills may welcome the lower cotton prices, but according to ICAC, the government’s cotton policy has done considerable damage to the industry in recent years.
“Since the start of its reserve policy in 2011, mill consumption has declined by 17%, from 9.6 million tons in 2010/11 to 7.9 million tons in 2013/14. In 2014/15, the decline in consumption in China is expected to slow, falling by just 1% to 7.8 million tons,” the report noted.
But consumption in India, Pakistan and Turkey–the next three largest consumers of cotton–is expected to grow in the 2014/15 season. World consumption in 2014/15 is expected to reach 24.3 million tons, a 3 percent increase over the previous season.
Despite the increase in world mill use, production is expected to decline 2 percent to 25.2 million tons, narrowing the gap between production and consumption.
“Most of the decline in world production will occur in China, where production is expected to decline by 10% from 6.7 million tons in 2013/14 to 6 million tons in 2014/15. As the Chinese government has restricted its support for cotton to just the Xinjiang region, area outside is expected to fall significantly,” the report noted.
India is forecast to produce nearly 6.3 million tons in 2014/15, which is a dip of 2 percent due to expectations that monsoon weather will not be as favorable as it was in the 2013/14 season.
World trade is expected to drop to 8.2 million tons in 2014/15 from the 8.7 million tons forecast for 2013/14.
“As with production, this decline stems mostly from China, where imports in 2014/15 are expected to be 2.2 million tons, down by 30% from 2013/14 and 60% from its peak of 5.3 million in 2011/12. However, China’s decline will be partially offset by imports from Bangladesh, Indonesia, and Vietnam, which are expected to import a total of 2.4 million tons in 2014/15, an increase of 13% from 2013/14,” according to the report.
China’s April announcement undoubtedly contributed to a decline in cotton price in the last week of March, and could continue to put downward pressure on prices in the coming months. The seven-market U.S. average spot price ended the month up 7 percent, at almost 88 cents per pound, almost reaching the 12-month high of 89 cents hit in August.