China having trouble counting bales

Bullish factors for cotton prices in the coming months include lower world stocks, a deficit between world consumption and production and the need for the United States to increase cotton acres in the midst of high grain prices, according to Gary Adams, vice-president for economic policy development, National Cotton Council.

Adams, speaking at the NCC's mid-year board meeting, said bearish factors for cotton prices include the potential for increased production in India, the uncertainty of cotton stocks in China and the impact of higher cotton prices on exports.

In recent years, China has emerged as the largest supplier of the U.S. retail market, with marketshare running around 30 percent, Adams said.

India has also emerged as a significant exporter on the world market, exporting a little over 4 million bales in the 2006 marketing year. “Their yields have improved, which has allowed their production to expand at a faster rate than mill use, a situation we could see continue over the next three to five years.

“Their textile industry looks poised for continued expansion, too, so the question is which industry is going at the faster pace and will they close that gap over the next couple of years?”

While Brazil harvested a 7-million bale cotton crop in 2007, “Brazil's textile industry is under the same pressures you see in other textile industries in the United States or Mexico in terms of imported products from China. The result is that as that additional production comes on line in Brazil, much of it will go into the export market as raw fiber.”

Although China has emerged as the largest user, producer and importer of cotton in the world today, it continues to bring uncertainty to the market, noted Adams.

“This time a year ago, the expectation for China's mill use was about 50 million bales, which is what it turned out to be. But expectations for imports were around 20 million bales, and that was cut in half. Where did that extra 10 million bales of cotton come from?”

Unaccounted-for stocks and higher production, according to Adams. “Last year, we thought China's production was around 27 million bales and its stocks were around 13 million bales. The production estimate turned out to be 32 million bales and stocks on hand turned out to be 18 million bales. This underscores some of the uncertainty around the data.”

China will continue to expand its textile industry, notes Adams. “We're still seeing yarn production and apparel exports growing at rates 15 percent to 20 percent above a year ago. That continues to drive its textile industry.

“It does face some challenges and constraints with high energy costs and tighter credit, which may temper some of its growth. Still, China consuming around 50 million bales and producing around 30 million bales paints a picture of substantial imports for the next several years.”

In 2007, Adams anticipates U.S. exports in the 15-million to 16-million bale range, although USDA has the figure slightly higher at 16.5 million bales. “We are off to a good start even at this early stage of the current marketing year. Total sales on the books right now are roughly 4 million bales.”

For 2007-08, USDA puts world mill use at around 127 million bales and world production at 115 million to 116 million bales, a gap of around 11 million to 12 million bales. “We have to keep in mind the unaccounted-for number. The discrepancy could run as much as 5 million to 6 million bales. It sets up a balance sheet where we should continue to see declining stocks, but perhaps not quite as tight as the numbers might imply.”

On the bullish side, December 2008 cotton futures must rally to assure sufficient cotton acres for 2008, according to Adams. “Corn futures are coming in around $4 and soybeans are holding between $8.50 and $9. At those relative price relationships, returns are still favoring competing crops.”

On the bearish side, there is still potential for expansion of production in India, Adams says. “And as cotton prices move up, the question is whether we can maintain demand at those higher price levels.”

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