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China’s Large Cotton Reserves Worrisome

January 27, 2012
By: Fran Howard, AgWeb.com Contributing Writer
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Like stocks of other major U.S. agricultural commodities, cotton inventories are building. USDA raised U.S. ending stocks to 3.7 million bales in its latest World Agricultural Supply and Demand Estimates. Ending stocks of cotton are now equivalent to 25% of total use. But that’s nothing compared to world cotton reserves.

 

"Weakening world demand and ample supplies are both weighing on cotton prices," says John Robinson, agricultural economist with Texas A&M University. USDA cut U.S. cotton exports by 300,000 bales to 11 million bales but left its forecast for the average marketing-year price basically unchanged at 86 to 94 cents per pound, narrowing both sides of the range by a penny.

 

Global cotton production fell slightly due to both declines in India and the United States, but world consumption fell 1%. China is expected to reduce consumption by 1 million bales as China’s economic growth slows. Consumption is also expected to drop in Thailand, where gross domestic product slowed to 1.5% in 2011. At the same time, USDA raised global ending stocks by 700,000 bales to 58.4 million, leaving the world stocks-to-use ratio forecast at 53%.

 

Artificial shortage
Prospects for world economic growth are poor, at best, says Robinson. USDA cut its cotton consumption forecast two months in the row. "There is an ongoing, weakening demand side," says Robinson. "But what troubles me is that the government of China has been buying stocks of cotton."

 

Charles Burmester, extension agronomist with Auburn University, is also concerned. "When prices rose, China used reserve supplies so there was not as much cotton shipped to China, which decreased world prices." Since then, however, China has once again been rebuilding supplies buying cotton at a lower price.

 

Recent reports show that China has already built its cotton reserves to at least 14 million bales, which equates to about 24% of world stocks. "The government of China is holding a lot of cotton in reserve, which has raised the price of cotton in China, but it is an artificial shortage created by government policy."

China’s high reserves introduce a large source of uncertainty into the market as to how and when China will release the cotton. "If the Chinese government allocates the reserve supply of cotton in a nice orderly way, it might not cause a disruption to the market, but if the government dumps it, who knows what will happen," Robinson says. A similar situation occurred in the mid-1990s, which caused both a boom and a bust in the world cotton market.

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