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Cotton Outlook: Consumption May Overtake Production in 2015/16

With global cotton production forecast to fall in 2015/16 and consumption expected to increase, the coming season could be the first in five years where consumption overtakes production.

According to the International Cotton Advisory Committee (ICAC), low cotton prices are expected to persist throughout the current season, resulting in a 6 percent lower world cotton area and a 6 percent dip in production to 24.6 million tons—the lowest volume since 2009/10. At the same time, consumption is expected to see a 2 percent uptick, possibly surpassing production by roughly 100,000 tons, just a small dent in the existing cotton stockpile.

Declining prices will make cotton less popular to plant in the coming season and those same lower prices could contribute to an increase in mill demand. Cotton Incorporated senior economist Jon Devine said, considered in conjunction, these two factors could result in a crop year where more cotton is used than grown, which would imply a reduction in global ending stocks.

“Normally, reductions in stocks are associated with upward pressure on prices.  However, the past several crop years have not been normal because of the distortions resulting from the Chinese cotton policies. Those policies concentrated world stocks in China, but much of that accumulated volume was not available to the market,” Devine explained. “Recent reforms suggest that the cotton held in reserves may become available. Correspondingly, it could be possible for consumption to exceed production next crop year, which would result in a decline in world cotton stocks, but for there to be an increase in available stocks if Chinese reserves are released. The balance of available supply could be expected to be a primary factor shaping price direction in coming months.”

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China’s moves have heavily influenced the global cotton industry, in particular over the past several years, and the country’s announcement last spring that it would cease purchases for its reserve system signaled a reversal in the direction of a major market distortion. According to Devine, since the reserve system is no longer a source of demand, it can likely be viewed as an eventual source of supply. Details regarding sales from reserves have not been made for the current crop year, but when those announcements are made, they can be expected to influence the market.

“Instead of fueling mill consumption, the cotton that the Chinese reserve system bought was generally warehoused and withheld. With the majority of recent Chinese harvests flowing into the reserve system, Chinese mills were fed with higher proportions of imported cotton,” Devine said. “Higher Chinese imports caused some scarcity of supply in exporting countries and that scarcity put upward pressure on prices around the world. In turn, those higher prices supported strong levels of global planted acreage and strong levels of global cotton production.”

The Chinese government also reduced the quotas it uses to manage access to the international market, and as the world’s largest importer of the commodity, the corresponding reduction in global import demand is “a major factor” behind the rebuilding of stocks in exporting countries.

“Stocks in exporting countries are available to the world market, and the increase in available supply has pushed prices lower around the world,” Devine said.

In China, cotton area is projected to fall for the fourth consecutive season by 10 percent to 3.8 million hectares, with production down 11 percent to 5.7 million tons, its lowest level since 2003/04, ICAC reported.

India raised its minimum support price for cotton in 2014/15, but for many farmers the price was still too low in relation to production costs and cotton area in India is forecast down 5 percent, according to ICAC. If yield is similar to what it has been in the last few seasons, production could reach 6.5 million tons, making India the largest cotton producer for the second straight season.

In the U.S., uncertainty over the new Stacked Income Protection Program (STAX), which provides farmers a layer of coverage beyond where traditional crop insurance programs stop, coupled with low cotton prices could make farmers less eager to plant, according to ICAC. Area in the U.S. is expected to contract 10 percent to 3.6 million hectares and production will decline 7 percent to 3.3 million tons for the 2015/16 season.

World cotton consumption will grow by 2 percent owed to moderate improvement in global economic growth of 3.5% according to the International Monetary Fund (IMF) forecast. But polyester prices have fallen faster than cotton prices for the better part of the season, eroding the price attractiveness of cotton, ICAC noted. Consumption in China is forecast to remain stable at around 8 million tons, roughly one third of world consumption. World cotton trade is expected to rise 4 percent to 7.9 million tons due to a partial recovery in consumption, namely in countries that rely on imports.

“The cotton industry does not exist in a vacuum and the macroeconomic environment in which it operates can also be influential.  Relevant recent macroeconomic developments include the decrease in oil prices, which can increase disposable income that can be used to buy clothing, as well as reductions to forecasts for economic growth in most countries outside of the U.S., which can mean slower consumption growth for downstream apparel and home textile markets.  While the general outlook calls for lower production and higher consumption, these demand-related macroeconomic variables could influence the magnitude of any separation,” Devine said.

New information on the cotton market will soon be available as the National Cotton Council will release results from its survey of U.S. cotton producers this weekend, and the U.S. Department of Agriculture will release a partial set of country-level estimates and preliminary global forecasts for the coming crop year at their Agricultural Outlook Forum on Feb. 19-20 in Arlington, Virginia.