The International Cotton Advisory Committee cautioned over “downward pressure” ahead on cotton prices, on the eve of Chinese auction programme expected to shrink the country’s stocks to the lowest in six years.
The ICAC raised its forecast for average cotton prices in 2016-17, as measured by the Cotlook A index of physical prices again – this time by 2 cents to 77 cents a pound.
However, the forecast implies a retreat in values, with Cotlook A levels as of Wednesday at 85.25 cents a pound, and have remained relatively elevated for most of this season, which started in August.
Indeed, the ICAC forecast “downward pressure on prices later this season” from a rise in cotton inventories outside China expected in 2017-18.
Chinese auctions loom
This forecast inventory rise contrasts with expectations for a further fall expected next season in China’s own inventories, fuelled by the restarting on Monday of auctions of the fibre from the country’s state stockpiles, built up by a now-scrapped guaranteed pricing scheme for farmers.
The auctions will offer 30,000 tonnes of cotton a day, although more could be released if demand warrants.
“Assuming a similar volume is sold this year”, the country’s overall inventories will fall to 9.3m tonnes as of the end of this season, extending further their decline from a high of some 13m tonnes reached two years ago.
China’s total stocks were forecast dropping further to 7.5m tonnes by the close of in 2017-18, contrasting with a rise of 7% rise to 8m tonnes in world inventories, lifted by rising Indian, Pakistani and US production.
“This would mark the first season since 2011-12 that China’s stocks account for less than half of world inventories,” the ICAC said.
‘Long been suspicious’
However, the comments come amid some doubts as to whether China will indeed succeed in selling as much cotton from its 2017 auction programme as it did from last year’s, with talk that the quality of fibre offered this time may be lower.
“We are wondering though if such an aggressive pace of selling can persist in the next round of Chinese reserve auctions,” said Tobin Gorey at Commonwealth Bank of Australia.
“We have long been suspicious that China’s cotton stockpile was of low quality. And we also suspect that China sold off the best of its reserves in its 2016 sales.”
If true – and if speculation is correct that high-end clothes may require as much as a 7:1 blend of high quality cotton to the lower-spec fibre released from the auctions – this “suggests China’s stockpile may come on the market at a slower pace than last year.”
ICAC vs USDA
The ICAC cut its forecast for global cotton inventories at the close of 2017-18 by 470,000 tonnes to 16.6m tonnes, reflecting reduced expectations for the rise in world output of the fibre this season.
The forecast for this year’s US harvest was downgraded by some 300,000 tonnes to 3.7m tonnes (17.0m bales), a figure in line with an estimate last week from the US Department of Agriculture.
However, the USDA was more generous on expectations for world inventories at the close of next season, seeing them at 83.9m bales, equivalent to 18.3m tonnes, and including 39.7m bales (8.6m tonnes) of Chinese supplies.
(Source – http://www.agrimoney.com/news/icac-forecasts-pressure-on-cotton-prices-as-chinese-sales-loom–10497.html)