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Cotton Prices at 11-Month High On New Demand Predictions

Cotton prices climbed to an 11-month high on Friday, as recent predictions indicate lower global cotton stocks than previously forecast. Production may exceed consumption if the Chinese continue stockpiling lower cost foreign cotton reserves. Steady price increases indicate a tightening supply.

Cotton was trading at 92.5 cents a point on the ICE Futures exchange on 15th March.

Cotton Incorporated, in its monthly letter, noted that May New York cotton futures contracts have been trading consistently higher than 86 cents/lb recently, up from 82 to 85 cents in February and 72 to 78 cents from October through January.

Prices were last higher than 90 cents in April, with cotton trading at a low of 68.83 cents/lb in June.

Overall consumption forecasts were up in March, from 106.2m to 107.1m bales according to the USDA. This is driven by higher mill-use figures for China, India, and Bangladesh.

At the same time, production is expected to be higher, as cotton growers reap stronger harvests in China, Uzbekistan, Mexico, and Turkmenistan. Cotton production is expected to be 119.9m bales. Ending stocks are down slightly, to 81.7m bales from 81.9. 54% of those stocks are held in China, which is keeping 44.1m bales in reserve.

Cotton supplies are supposed to continue to be concentrated in China, driven partly by a price floor imposed by the Chinese government on domestic cotton which pushes mills to seek foreign cotton and stockpile it to increase market liquidity.

Chinese mill-use is set to fall 4%, partly as a result of this policy, but the production should simply shift to other cotton milling countries that aren’t part of China’s price subsidy scheme but are able to export yarn to China. Those same countries – which include Bangladesh and Pakistan – may also be able to capture more orders for fabric and apparel as a result of concentration efficiencies and shipping cost savings on raw materials.

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Overall, consumption is forecast to increase by as much as 2.6% in 2013 and 2014, according to the IMF. This should not prevent world cotton stocks from growing for the forth consecutive year, with a predicted rise of 7.9% worldwide and a 16.3% increase in China.

Cotton International points out that China has been a major supporter of cotton prices worldwide through its buying program, but that it cannot continue to stockpile cotton indefinitely, particularly if rising wages continue to erode the competitiveness of its domestic industry. The country could then be expected to sell, which could potentially lead to a glut of cotton in world markets. The timing and aggressiveness of these sales will be major factors in how much prices drop when China begins selling.