China’s Large Cotton Reserves Worrisome

January 26, 2012 08:20 PM
China’s Large Cotton Reserves Worrisome


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.


Cotton to compete for acres

Global response to record-high cotton prices in late 2010 and early 2011 has been quick on both the supply and demand side. In late 2010 and early 2011, many analysts thought cotton prices would remain high for a couple of years, says Burmester. But a quick supply and demand response proved pundits wrong as manufacturers switched to less expensive polyesters and blends, and the world’s cotton producers ramped up production.


Despite a steep drop in cotton prices over the past year, cotton should be able to compete with corn and soybeans for acreage this spring. "The magic price is still $1 per pound," says Burmester. "If cotton jumps back above $1 per pound, more people will want to plant it." U.S. cotton futures have been trading just under $1 per pound. He expects both U.S. and Alabama cotton acreage to decrease only slightly this year.


Robinson agrees, noting that early estimates show Chinese growers plan to plant about 10% fewer acres to cotton this spring and says U.S. acreage could also be down slightly. "World cotton prices are still high for Uzbekistan, West Africa, and India, though, with the A-Index still around $1 per pound," he says. "World acreage could be less this year than last year, but it will still be higher than a few years ago."

A comprehensive survey of world feed production shows that China, not the United States, is the world’s largest producer of feed grains and oilseeds.


Global feed tonnage hit a record estimated 873 million metric tons last year, according to a worldwide survey of 132 countries by Alltech, a global animal health and nutrition company operating in 128 countries and headquartered in Lexington, Ky.


"This new global estimate is quite significant, especially when compared to the 2010 WATT report, which indicated 717.6 million metric tons," said Aidan Connolly, vice president of corporate accounts at Alltech. "This new estimate is a more accurate number and demonstrates that agriculture is more important than anyone has given it credit for up until now."
Connolly cautions that Alltech’s numbers cannot be compared directly with WATT’s survey, but says feed production worldwide is probably growing at an annual average rate of between 4% and 5%. Most of the growth is occurring in the developing world, particularly China and India, where consumption of animal products is rising rapidly. Growth is also occurring in countries that export large quantities of feed, such as the United States and Brazil.

One of the major surprises of the survey is that China, with production of 175.4 million metric tons, surpassed the United States, with 165 million metric tons, as the world’s largest producer of feed crops. China’s production figure is conservative because on-farm mixing has not been accounted for, says Connolly. "On-farm mixing could add an additional 300 million metric tons," he says.


In terms of regions, Asia with 305 million metric tons produces more feed crops than either North or South America or Europe. Following Asia in feed production are Europe with 200 million metric tons, North America with 185 million metric tons, Latin America with 125 million metric tons, and the Middle East and Africa with 47 million.


Connolly notes that meat consumption is expected to grow by about 2.5% annually and aquaculture by 8.4%. "Growth of 2.5% doesn’t sound like a lot, but it represents a huge increase from now until 2050—a doubling of the amount of meat consumed in the next 30 years," Connolly says. "Doubling would be the conservative estimate. Some believe it will triple."
The survey is the first ever for Alltech and does not include forages fed to dairy cattle. "That forage could be up to five times the amount of feed dairy operations are feeding," he adds. The company hopes to complete a similar survey next year, which could give year-over-year comparisons of worldwide price responses.


"We have seen more interest in feed production over the last 15 months than we have over the past 15 years," notes Connolly.


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