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Rice Market to Accelorate

Commodities Corner | SATURDAY, NOVEMBER 16, 2013

By ALEXANDRA WEXLER

China has been building cotton stockpiles for more than two years. When it begins to release that inventory, look out below.

Cotton futures are set to unravel.

China possesses nearly 60% of the world's cotton, after purchasing the fiber from its own farmers and abroad since late 2011. That was the year prices spiked to a post-Civil War high of $2.27 a pound, and China, the world's largest cotton consumer, had to scramble to find enough fiber to fulfill its needs.

But China's cotton imports have slowed lately, down 20% this year, through September, from the same period a year ago, according to data from the country's General Administration of Customs. Now traders on the global market worry that the secretive government body that manages China's hoard will begin releasing stocks to domestic mills, potentially crushing demand for imports from countries like the U.S. that rely on China to buy their cotton. That should keep cotton prices under pressure through March, traders and analysts say.

"With China not buying anymore, I don't think the market has anywhere to go but lower," says John Payne, senior broker and market strategist at Daniels Trading, a Chicago-based brokerage.

Cotton futures have already begun to slide, sinking 12% in October. Payne expects cotton prices to dip below 70 cents a pound in the first quarter of 2014, down from a high of 92.5 cents a pound during the first quarter of this year. Cotton for March delivery settled Friday at 78.20 cents a pound.

Market participants in China say the China National Cotton Reserves Corp., which manages the stockpiles, will release the first batch of cotton around late November or early December.

CHINA'S HOARDING HAS kept production of the fiber booming over the past few years, despite waning demand elsewhere. The Agriculture Department estimates global production outpaced worldwide use of cotton by 16 million 480-pound bales during the season that ended July 31. That's about 13% of global output. But with so much of that extra fiber locked up in China's warehouses, the market hasn't felt the effects of the oversupply.

China's "artificial support of cotton prices kept global planted acres high enough [in the] last years to not allow for any drawdown of the current global glut," says Shawn Hackett, president of Hackett Financial Advisors, a brokerage and consulting firm in Boynton Beach, Fla. "This now means the cotton bear market will need to extend for another crop cycle."

The USDA forecasts that an even-higher percentage of global cotton stocks will be locked up in China's reserves at the end of the marketing year.

To be sure, a release of China's cotton stocks could fall flat. "Just because they have the auction process, there's no arm-twisting in here to make sure these mills buy it," says Sharon Johnson, senior cotton specialist at KCG Futures in Atlanta.

The CNCRC held daily auctions of its cotton from January through July this year. However, mills bought just 25% of the cotton offered due to the high prices the reserve wanted, traders say.

But regardless of domestic mill demand, "sooner or later they're going to have to begin whittling those supplies. That is really the big issue hanging over the market," says Gary Raines, the chief fiber and textile economist at INTL FCStone. "Everything else is kind of rearranging deck chairs on the Titanic."

ALEXANDRA WEXLER reports on cocoa, coffee, cotton, sugar and orange juice for The Wall Street Journal.

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