China Remains a Question Mark
Over the past few months, the market indicated a coming shift in Chinese cotton policy. Although anticipated, the details of any changes are still unclear, leaving cotton’s outlook once again under China’s influence for 2014.
“The one thing we see is that China stands above all others in terms of the question marks that we have,” said Adams. “It has certainly shaped where we’ve been over the last three years, and it continues as we look ahead to 2014.”
Adams pointed out that China – under its current cotton policy – purchased approximately 75 million bales of cotton for their reserves over the past three years, including the country’s internal crop. Although world production of cotton has continued to exceed use outside of China, the Chinese have generally absorbed the excess cotton and helped support prices, which have moved in a sideways range over the past year.
“Because prices have stayed relatively stable, we’re not seeing a signal being sent at this point to countries around the world to really back off of production,” stated Adams.
Adams believes the change in China’s cotton policy will come following the 2014 crop.
“They will be moving toward a target price mechanism,” he reported. “Details have not yet been announced, but it’s been indicated that the target price program will apply only to the western region of their country, which accounts for 60 percent of their production.
“Obviously, there are still many questions to be answered regarding production, what they will do with their reserves and how this will impact the export market.”
The NCC economic outlook report projects China’s cotton production to fall to 30.1 million bales in 2014, down 3 million bales from 2013. Mill use in China should see modest growth to 36.4 million bales, leaving a 6.3 million bale differential with production. But, with nearly 54 million bales currently in reserve, any production shortfall can be easily managed.
“Strictly looking at the balance sheet, China does not need to import any cotton,” said Adams. “However, that is not expected to be the case. China must open 4.1 million bales of import quota at a minimal duty in order to comply with their WTO accession commitments. It is also expected that some amounts of quota for the processing trade will be made available.
“Under these assumptions, the NCC projects China to import 6.4 million bales in the 2014 marketing year, down from 11.0 million bales in 2013. If realized, it would be the smallest level of imports in a dozen years.”
2014 should mark the fifth consecutive year with global cotton production exceeding consumption. But, unlike recent years, world stocks outside of China are expected to increase. Since the U.S. annually exports more than 70 percent of its cotton production, Adams suggests that growers keep an eye on this potential development.
“Smaller imports by China and increased stocks outside of China underscore the very competitive markets facing U.S. cotton,” he stated.