Is There A Bear In The China Cotton Shop?

China is the big key to 2013 cotton crop prices.

Published on: Jan 21, 2013

By Don Shurley

After  dropping  below  80  million  bales  last  month,  world ending stocks for the 2012-13 crop year are now estimated at 81.72 million bales.  The major reason was that foreign production  was  raised  almost  2  million  bales--  China's production  was  raised  1  million  bales.    Also, world  use, or demand, dropped by almost 500,000 bales.

 It is no secret that China is a big key to the outlook for 2013 crop prices.   It is forecast that China's stocks/reserves on hand going into the 2013 crop year on August 1 will be 5 million bales more cotton than they use in an entire year.

Is There A Bear In The China Cotton Shop?
Is There A Bear In The China Cotton Shop?

So, it's a big deal what their policy will be for using these stocks  vs.  importing  new  crop  cotton.    It  was  reported recently  that  Chinese  mills  might  be  allowed  to  import cotton if they also agreed to buy from the reserves.

It appears that in an attempt to increase its once very low reserves, China may have gone overboard and purchased too much cotton.  China continues to be a buyer and while this continues to support prices in the near term, this large buildup of stocks must eventually begin moving into the pipeline and the uncertainty of when and how that will happen hangs over the market like a dark cloud.

Dec '13 cotton futures were down slightly late last week.  New crop corn is now below $6 and soybeans below $13.  In the meantime, cotton has trended up but seems to have hit a ceiling at 79 to 80 cents per pound.  The implication is that some of the competitive disadvantage that cotton is expected to have with regard to 2013 acreage decisions may have lessened.  US cotton acreage will be down in 2013. There's no doubting that.  But, the magnitude of the decline may not quite be what we once thought.

We'll just have to wait and see.  I think a 15% to 18% decline is likely. At this juncture, based on the evidence before us to date, prices for the 2013 crop could reasonably range between 70 and 85 cents.  You don't want to sell most of your crop at the low end if prices head that way.  Take some protection.  But leave some room to take advantage if prices do go to the upper end.

Shurley is the cotton economist with the University of Georgia Cooperative Extension.