Chinese Imports Spark Cotton Futures

January 19, 2011 07:56 AM
 

Cotton futures this week have been buoyed by a Chinese trade group's report of hefty cotton imports during December, adding to the established support from global supply and demand.

March futures traded early today between $1.4776 and $1.5044 while the December contract ranged from $1.035 to $1.0779. Contracts through March 2012 traded at or above $1/lb.
 
Citing customs data, China Cotton Association reported Monday that during December, China imported 462,000 metric tons of cotton, up 266% from November and up 113% from December 2009. The association said the average import price rose nearly 13% from November to $2,656/metric ton.
 
China's cotton demand has been a big factor in price strength, notes Carl Anderson, professor emeritus at Texas A&M University.
 
“This year, they had to admit they had to buy cotton,” says Anderson. “They ran the price up in their own country on their own cotton, then came to the world market. Even though the price went up, and index funds and hedge funds drove it higher, they had to buy. We got to a price we've never had before.”
 
Although the reported December imports were high, they were not out of line with USDA's January estimates. China's August-December imports reached 5.2 million bales, or roughly one-third of the 15 million bales USDA projects for this marketing year. In the past three years, China imported 35 percent to 45 percent of its annual imports from August through December.
 
Two major factors in China's high imports in December were Indian export policy and availability of U.S. supplies, says one international cotton market analyst. India shipped a lot of its cotton exports early in the 2009-10 season, but last April India restricted exports. It opened exports again in November, leading to a surge in shipments to China. December also is usually the first month for strong shipments of new-crop U.S. cotton.
 
Reduced global stocks have added to buyers' urgency. Ending stocks had been about 60 million bales for five years, but fell below 44 million bales last July. USDA projects ending stocks at 42.8 million bales this July. “People were scrambling to try and lock those in,” says one analyst.
 
Cotton prices may have limited upward potential because polyester may fill part of the demand for fiber. In China, says Anderson, “They're increasing the percentage of polyester in all cotton fiber blends.”
 
A source with fibre2fashion, an India-based textile services organization that provides news and market information, confirms that synthetics are gaining volume. The company reports that cotton prices are rising, but says cotton is staying competitive as prices for other fibers also rise.
 
In the United States, Anderson expects March futures to stay around $1.45, and says December futures likely will continue to trade at more than $1 per pound. As for the price range on December futures, “I'd say 85 cents to $1.25, with potential to go above that if adverse weather moves in on any of the large producing countries, the United States included.”
 
He expects the tight supply-demand balance, domestic and global weather developments, and investment funds to keep prices volatile. Anderson recommends that growers market part of their crop in a pool or marketing association, part of it under contract, and maybe hedge some of it with spread positions. And, says Anderson, “We advise all growers to use crop revenue insurance.”

 

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