Global Cotton Stocks, Consumption Rise

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There is bound to be a spurt in supply of cotton crop for the year 2016-17 due to bumper crop production in cotton growing countries across the world. Recent USDA report featured increases to both world production and mill-use for the cotton sector. The increase to the global harvest figure was marginal (+222,000 bales, from last report), but lifted the projection from 102.5 to 102.7 million. The revision for mill-use was, however, more significant (+797,000 bales), with the global figure rising from 111.2 to 112.0 million.

Driving much of the increase in global consumption were changes to Chinese estimates. Chinese consumption figures were increased not only for the current 2016/17 crop year (+500,000 bales), but also for the two previous years (+1.0 million bales for both 2014/15 and 2015/16). When historical revisions are made, there is a cumulative effect on stocks and these changes to Chinese mill-use were a primary reason why the forecast for 2016/17 ending stocks dropped 2.5 million bales (from 89.8 to 87.3 million).

This remains an extraordinarily high level relative to anything the market had seen prior to the vast accumulation of Chinese reserves in the wake of the 2010/11 spike, but it is an indication that the de-stocking process should conclude sooner than previously thought.

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At the country-level, the largest changes to harvest expectations were for Australia (+500,000 bales to 4.0 million), Mali (+125,000, to 1.2 million), the U.S. (-108,000, to 16.0 million), and Brazil (-150,000 bales, to 6.5 million). For mill-use, the biggest changes outside of those for China were for Bangladesh (+400,000 bales, to 6.4 million), Indonesia (+100,000, to 2.9 million), and Uzbekistan (+100,000, to 1.5 million).

Global trade forecasts were lifted 1.0 million bales. On the export side, forecasts were increased for Australia (+800,000 bales, to 3.9 million), the U.S. (+500,000 bales, to 12.0 million), Uzbekistan (+300,000 bales, to 2.2 million), and Mali (+100,000 bales, to 1.2 million) while the export figure for Brazil was lowered (-500,000 bales, to 2.9 million).

On the import side, projections were increased for India (+500,000 bales, to 1.5 million), Bangladesh (+400,000, to 6.3 million), and Indonesia (+100,000 bales, to 2.9 million). There were no significant downward revisions to import estimates.

Cotton Price Outlook: China

China's successful offloading of a significant portion of their accumulated cotton stock through the July-September sale has reduced demand for cotton available outside China. Further offloading of stocks will resume in the lean season commencing March 2017.

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The most recent increases in Chinese prices accompanied the conclusion of sales from the reserve system. Harvesting of fresh crop has begun in China and as the volume of cotton picked and ginned starts to accumulate, some of the upward pressure may abate.

But this year's Chinese crop is going to be very small by historic standards, with only 21.0 million bales expected to be collected (ten-year average between 2005/06 and 2014/15 is 33.2 million bales). However, with reserve sales scheduled to recommence in March, the domestic crop will only be crucial during the five month period between October and February, when no cotton reserve cotton will be sold. Assuming stability in monthly consumption, five months of China's 35.0 million bale mill-use forecast suggest that 14.6 million bales are needed during this time period. Since the harvest easily exceeds this amount, it could be expected that supply-related price pressure will ease.

Cotton Price Outlook: Global

Outside China, the availability of fibre during the current crop year to improve significantly as leading cotton growing countries have estimated higher harvesting volumes.

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India, USA, Pakistan, Brazil, Uzbekistan, Australia all the big producers of cotton indicates improved production. On the other hand, there has been a downfall in Chinese demand for cotton yarn imports from both India and Pakistan (shipments down more than 30% from both countries during January-August 2016) which indicates a stagnant consumption of cotton in the Indian subcontinent.

So, the price outlook for cotton in the global market does not seem rosy at the current scenario. The increase in fibre supply resulting from larger harvest among exporting countries has been a major reason why downward pressure has been expected to develop outside of China.

In fact, China's policy would govern the global price situation in the coming months especially after March 2017.


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