Burdensome cotton inventories? Think again

Cotton prices have been on a tear, bucking the trend of many commodities. Both old and new-crop contracts have moved to highs not seen since last spring. The rally is somewhat of a surprise, because global warehouses are reportedly stocked to the rafters. In the February crop report, the USDA maintained its estimate for 2012-13 global ending stocks at a burdensome 81.86 million bales, or 77 % of consumption. That is a record – modern day or otherwise – by far, for cotton, or any other commodity that we trade, for that matter.

There are two forces at work. Apparent demand seems to be robust. The US export pace for the 2012-13 marketing year has increased substantially. At the beginning of January, export commitments were running 13% behind the same time last year. At present, commitments of 10.089 million bales are only 3% behind the same time last year. We expect that exports will catch up and exceed last year’s tally. In 2011-12 a significant portion, about 25%, of total sales were bunched in October and November.

After that, exports were sporadic through the end of the season. This season, export sales have been steady, right through from the start of the marketing year in August. Moreover, shipments of 5.9 million bales are actually ahead of last year at this time by a substantial amount – over 1 million bales, or 21% – which lowers the risk of cancellations.

Another interesting distinction between this season and last is China. Bears cite the possibility that China will begin to sell off stocks into the domestic market as world prices increase, lowering the need for imports. But Chinese imports have not been the driving force this year that they were in the past. Total year-to-date sales to China in 2012-13, shipped and unshipped, are just over 4 million bales, down close to 30% from last year when total sales at this juncture were 5.7 million bales. Even if China pares back imports, commitments have surpassed 10 million bales, and with 5 months remaining in the marketing year, the 12.5-million-bale USDA target is well within reach. Weekly sales would have to average about 100,000 bales.

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