Cotton prices proved remarkably strong, compared with most agricultural
commodities, in 2013, rising some 12%.
And this despite huge world inventories, which hit a record
high of 89.1m bales as of the end of 2012-13 according to the US Department of
Agriculture, and are expected to grow further this season.
However, the rub for investors is that most of these
inventories are in China, leaving relatively little for the world market.
But will China continue the agriculture support programme
behind soaring stocks?
Concerns over a switch from a guaranteed cotton price
scheme, at levels well above those of the global market, to a direct farmer subsidy
mechanism drove prices to below 74 cents a pound in November, before a recovery
fuelled by dwindling stocks certified for delivery against ICE futures.
"The big question for 2014 is indeed how Chinese
policymakers will support their cotton producers in the future.
"If China should now pursue a policy of direct subsidisation
instead of maintaining artificially high cotton prices, Chinese cotton manufacturers
are likely to continue to cut back on their imports.
"The point is that one of the key pillars of international
cotton prices is now being seriously undermined. The downward trend should be
mitigated, however, if recent reports coming out of China prove true, namely
that the harvest was damaged by an early frost.
"Given the likelihood that China will reorient its cotton
policy, a higher US supply in 2014 and given that the international market
remains well supplied, we expect cotton prices to fall in the course of 2014."
"We expect to start 2014 constructively, given tight cash
"China is committed to maintaining its existing support
programme for 2013-14. This, along with healthy demand could result in strong
US exports, leading to tighter US and ex-China global stocks.
"The start of the 2014-15 season will see prices come under pressure
as world cotton acres rise and Chinese imports fall as China clarifies its intentions
regarding its vast state reserves and price policy."
"Our base case is for cotton futures to ease by over 10%
during 2014, as acres increase and US ending stocks rise on higher production.
Forecasts for quarter
average, front New York futures contract
Rabobank forecasts for
cotton prices, 2014
Q1: 75 cents a pound
Q2: 77 cents a pound
Q3: 75 cents a pound
Q4: 73 cents a pound
"Global cotton acreage will likely rise 3% year on year in
2014-15 to 33.3m hectares, as December-November 2014 price ratios favour the
fibre over corn and soybeans.
"World cotton production is forecast to rise by 3.6m bales
to 120m bales.
"Ending stocks in the US, the world's leading exporter and
driver of the ICE cotton contract, are expected to rise to 5m bales in 2014-15 –
the highest level in six years."
"We continue to see bearish risks as Chinese demand falls
and global inventories begin to grow. Therefore, we remain bearish for the
"As expected – though earlier than we had envisioned – Chinese
cotton imports have slowed down with the start of the 2013-14 crop year. While
some uncertainty still exists regarding their production, and its effect on
imports, we expect a continuing reduction as the marketing year continues.
"Looking ahead, we continue to see stable to growing global inventories.
This should keep prices in check over the next few years.
"However, our long-term projections eventually see declining
supplies as the global economy, and demand for cotton, improves – leaving us to
expect higher prices in the long term."