Cotton Outlook Shaped by China’s Policy

National Cotton Council economists say cotton's 2014 outlook will be influenced by China's policy decisions.

Dr. Gary Adams, the NCC's vice president Economics & Policy Analysis, told delegates at the NCC's 76th Annual Meeting here today that China's announcement of their intention to cease building reserves and offer support through a target price mechanism will shape cotton's outlook for 2014.

"For the past three years, China has been importing the world's surplus while its own production has entered the reserves," Adams said. "For the 2014 marketing year, that dynamic appears poised to change."

He said that outside China, production exceeded mill use by almost 57 million bales over the 2011-13 period, and exporters found a home for their cotton in China as China imported 56 million bales. In effect, China absorbed extra supplies from the world market, thus supporting world prices. To date, the Chinese government has announced their intention to end the accumulation of reserves and institute a target price program in the country's western region. No support mechanism has been announced for the eastern growing regions. It is also assumed that there will be no change in operation of import quotas but quantities above the required tariff-rate quota are expected to be less than in recent years.

In view of the uncertainty regarding the policy change and speculation that the eventual target price will be below the current reserve purchase price, the NCC projects China's cotton production to fall to 30.1 million bales, down from 33.0 million in 2013.

For the 2014 marketing year, Adams said the change in cotton policy should alleviate some of the pressure on textile mills in China and provide more competitively priced cotton. As a result, the NCC expects mill use in China to see modest growth to 36.4 million bales, leaving a 6.3 million bale differential with production.

He said that with an estimated 58.3 million bales of stocks on hand at the beginning of the 2014 marketing year, there are more than ample supplies to satisfy the production shortfall.

"Strictly looking at the balance sheet, China does not need to import any cotton," the economist stated. "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. In addition, it is 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."

Based on the NCC Annual Planting Intentions survey, the NCC projects 2014 U.S. cotton acreage to be 11.26 million acres, up 8 percent from 2013. Average abandonment and yields in line with recent trends for each state result in 2014 Cotton Belt harvested area of 9.59 million acres and production of 16.37 million bales. If realized, that would be an increase of 3.2 million bales from USDA's current 2013 crop estimate.

For other cotton-producing countries, Adams said an "A" Index in the range of $0.90 per pound is not signaling producers to reduce cotton area.

"For 2014, countries outside of China are expected to produce 87.9 million bales and consume 76.4 million bales, giving a differential of 11.5 million bales," he said. "The 2014 expected surplus is similar to the current marketing year and the smallest since 2009. However, the key difference in 2014 will be the extent to which China maintains that same pace of imports under the new policy."

Globally, the 2014 marketing year represents the fifth consecutive year with production exceeding consumption. Production of 118.0 million bales and mill use of 112.8 million bales adds another 5.4 million bales to global stocks. At 103.0 million bales, ending stocks are projected to surpass the 100 million bale mark significantly. Adams noted that in recent years, China has accounted for the increase in global stocks as stocks in other countries declined. For 2014, the situation is expected to be reversed as China's stocks are projected to remain stable and the increase in world stocks occurs outside of China.

"Smaller imports by China and increased stocks outside of China underscore the very competitive markets facing U.S. cotton, which annually exports more than 70 percent of production," he noted.

Source:NCC