Rice Market to Accelorate
Corner | SATURDAY, NOVEMBER
China has been building
cotton stockpiles for more than two years. When it begins
to release that inventory, look out below.
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.
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.