China: Still the Elephant in Cotton’s Room
By Sterling Terrell
I heard someone – I think it was the late Professor Randy Pausch – once say, “If there is an elephant in the room, introduce it.”
With December recently breaking 70 cents (and lower), I would like to make an introduction. Meet China.
In the world of cotton, China is, of course, the enormous elephant in the room.
China is the world’s largest cotton producer, producing somewhere around 35 million bales per year by most estimates. Also, China is the world’s largest consumer of cotton, taking in and using somewhere between 35 and 40 million bales per year.
With this year’s worldwide cotton production expected near 116 million bales, that puts China producing and consuming almost one-third of the world’s cotton.
The current, and increasingly problematic, situation lies with the amount of cotton that China is now holding in stock in its national reserves. By most calculations, over half of the world’s raw cotton is in storage somewhere in China.
China has recently abandoned its stockpiling program in pursuit of direct farmer subsidies. But, I believe, the large cotton stocks are still concerning.
From others, I have heard nearly every deflection in the book:
“Yes, China has lots of cotton in storage, but they will never disturb the world market in a large way.”
“Sure China’s cotton stocks look bad, but they would never dump all that cotton and hurt their domestic producers.”
“See, China has accumulated much of its cotton at prices that are higher than the average world price. They will never take a 20 to 30 cent loss per pound on their reserves.”
For all I know, each of those statements is exactly true. Nonetheless, let me say three things in response:
- Current prices are, of course, based on current and expected buying (as well as supply).
- China will not buy and store cotton indefinitely, without dipping into their reserves.
- The last time China held around 50 percent of the world’s cotton stocks, prices pushed to multi-year lows.
Let me touch on that last point further.
Other than the recent level, China’s cotton stocks have touched 50 percent of world cotton stocks just once since 1981. That was in 1998. During that crop year, prices averaged around 62.8 cents per pound.
1998 was followed by 57.5 cents in 1999, 56.8 cents in 2000, and 40.5 cents in 2001.
Without being technical, my data shows that while a change in the portion of world cotton that China has in its reserves is moderately correlated with current futures dollar prices, changes in China’s percent of world cotton stocks is more correlated with futures dollar prices in following years.
Said different, China’s 1981-2012 stored percent of world cotton stocks is more highly correlated with prices in any of the next three years than with prices in the current year.
Are we headed to 1998-2000 again? Who knows?
Is there anything really to worry about? Maybe not.
I am not certain that multivariate regression models and average prices are anything worth taking to the bank. But China’s cotton stocks – coupled with the recent slide in prices – are definitely something to think about.
Sterling Terrell is an independent cotton analyst.