Chinese cotton inventories may usher in the bear

Global cotton (NYBOT:CTV13) output is expected to fall by 2.6% from the previous season, to 118 million bales, while consumption is expected to grow by 2.2%, to 110 million bales. Still, the balance sheet for the global cotton market is set to record yet another production/consumption surplus that will be heaped on top of burdensome carryover stocks from the 2012-13 marketing year. Ending stocks are estimated to grow to a record 94.34 million bales, or a staggering 85.9% of usage. That’s up from 79.6% last season and 68.9% in 2011-12.

What’s been keeping the market afloat, and whatever it is, can it last?

The U.S. is the world’s largest exporter of cotton, so there is a heavy focus on the U.S. crop. Planted area was 17% below last year and 30% smaller than in 2011-12. The crop was planted very late because of the very wet spring. Some key growing regions in Texas are now experiencing severe drought that will probably result in a high rate of abandonment that will reach 40% in the Southwest.

Average national yields are expected to suffer, falling to 831 pounds per acre, compared with 887 pounds per acre last year. In the July crop report, the USDA raised its acreage and yield estimates, but also increased its estimate for abandoned acres, leaving the forecast for the crop unchanged from June at 13.5 million bales. That will be the smallest crop since 2009-10. The supply side is not the issue, though. As illustrated above, warehouses are bursting at the seams. Crops in producing nations, other than the U.S., are about the same size as in recent years.

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