China’s Purchases Offset Bearish USDA Report
February 16, 2012 Special Report from the China National Cotton Information Center.
The recent USDA report – which showed an increase of 527,000 tons in global ending stocks – has had a negative effect on global cotton prices, but some analysts believe the negativity is unwarranted due to continued purchasing from China.
During the week of February 6-10, Greece’s debt issue triggered turmoil in the financial markets. ICE futures continued to be weak because of its bearish outlook of global demand. USDA’s February report surprised the market and resulted in a substantial drop of cotton prices, which fell below 90 cents. As of February 10, the price of ICE futures March contract was 90.61 cents per pound, down 5.73 cents per pound from the prior week.
Actually, investors were adjusting their position several days before the publishing of the USDA report. With a stagnant global economy and negatively affected the industrial textile chain, investors were bearish on global cotton demand. In addition, index fund rollover transactions also brought great pressure to the market. March contracts before the USDA report had been down for three consecutive sessions from 96 cents to 93 cents.
However, the USDA monthly report delivered a blow to the market, which was unprepared for the increase in global ending stocks – a fact compounded by a 61,000-ton decrease in global cotton consumption. In addition, global cotton output increased by 109,000 tons and beginning stocks increased by 357,000 tons. The big differences between supply and consumption resulted in enormous sell-off in ICE futures market. Thus, cotton price decreased to 90 cents per pound.
Some analysts believe the bearish reaction was groundless because the USDA report also showed that China’s imports increased 218,000 tons. Supply and demand in China has played an important role in global market. With large quantities of cotton being absorbed by the reserve system, China must increase imports to fill the gap. Thus, an increase in imports was not surprising. The big drop in international cotton prices provided China with a good opportunity to import cotton, which in turn provided support to the international cotton price.
The National Cotton Council of America issued the cotton acreage intention survey results for 2012 in December. The figures showed that intended cotton planting acreage in the US was 5,519,000 hectares, down 7.5% from 2011. Those figures did not surprise the market, and thus didn’t have a major impact on price trends.
With a cotton price of 90 cents, demand in the sports apparel market could increase. With the adverse influence of the USDA report in diminishing, the ICE futures price is expected to remain stable at about 90 cents.
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