China may not be the negative threat to cotton prices that many investors believe, Morgan Stanley said, forecasting a further round of stocks rebuilding which could raise inventories to the equivalent of 10 months' demand.

Investors have trod warily over Chinese policy towards state inventories since it rebuilt them to an estimated 4.4m tonnes, leading to record imports besides the purchase of some 3.1m tonnes from last year's domestic harvest.

Indeed, the government is expected to begin selling down its stocks, at 18,500 yuan ($2,900) per tonne, to support local mills facing enhanced competition from low-cost countries – although, at some 200,000-300,000 tonnes the initial release is smaller than the 1m tonnes traders had expected.

However, China looks prepared further ahead to return to stockpiling, to support the minimum support price of 20,400 yuan a tonne it has promised farmers, well above a market price below 19,000 yuan a tonne.

The minimum support price, equivalent to 88 cents a pound, is also well above the value of New York futures, which for the best-traded December lot closed at 76.65 cents a pound on Wednesday, up 1.4% on the day.

'In acquisition mode'

"For now, the Chinese National Cotton Reserve Corporation remains in an acquisition mode," Morgan Stanley said.

"Local accounts suggest that the CNCRC is prepared to pick up comparable quantities to last year's programme in support of the minimum support price."

And already China "has demonstrated a willingness to continue importing from the US", the top exporter, with advance orders from America, at some 2m bales, the third highest in recent history.

"China's reserve purchases remain the largest bullish risk to this market, a risk we take very seriously."

'Don't bet against China'

In fact, the bank said it was "uncertain that China will have the political will to support its minimum support price as strongly as they did last year", noting that the reserve corporation has not committed to stockpiling targets.

However, even a smaller rate of stockpiling, of 6.7m bales (1.5m tonnes), would be sufficient to trim US stocks at the close of 2012-13 to 28%, down from the US Department of Agriculture's forecast of 35.6%.

The stocks-to-use ratio, as a measure of the availability of a raw material, is seen as a key indicator of price potential, with lower ratios signalling higher values.

Global stocks of cotton may be "huge, but don't bet against China", Morgan Stanley said, restating a forecast of cotton prices averaging 80 cents a pound in 2012-13, above the futures curve.

"After a meaningful downturn over the last five months, we now see the risk-reward in cotton as more balanced."

Production prospects

The bank made this assessment despite cautioning that investors may have become too downbeat over the threat of weather threats to 2012-13 production hopes.

India's weak monsoon was "unlikely to materially dent supply", signals from planting rates indicated, while Chinese production prospects were "favourable", despite heavy rains.

"While some of the recent weather has been severe, raising concerns over the safety of the bolls, we see no reason why the USDA's forecast of [a Chinese yield of] 1,204 pounds per acre should not be attainable."

In the US itself, Hurricane Isaac poses a "real" threat to cotton output, with nearly one-quarter of the crop in the sensitive boll-opening phase.

However, overall, conditions are "still adequate, if not ideal for the US cotton crop".