China alone explains why cotton prices
have not fallen to an all-time low, and indeed are proving surprisingly
involatile, and why production has continued to drive a build-up in world
stocks of the fibre.
"The significant features of the cotton industry at the
start of 2013 are those that are not happening," the International Cotton
Advisory Committee said.
These include a dearth of price volatility, with the gap
between market highs and lows, typically 34% over average Cotlook A physical
prices over a full season, running at 9% in the first give months of 2012-13.
There has also be a lack of a production response to huge
supplies, with output set to remain some 10% above consumption in 2012-13 –
lifting stocks to the equivalent of 70% of consumption, the highest figure
since the end of World War II.
"Accordingly, prices might be expected to be record low,"
the ICAC, an intergovernmental group, said.
The stocks-to-use ratio is a key pricing metric, indicating
the looseness of supplies and thereby the level of competition needed among buyers.
"However, the Cotlook A index has averaged 83 cents per
pound so far this season, well above the long-term average of 69 cents per
Stockpiling by the China of some 9m tonnes of cotton for
state reserves - which began in 2011-12 and will continue through March of this
year - explains the anomalies, the committee said.
"More than 10m tonnes could be in the reserve by that time.
"With 25% of 2012-13 global cotton supplies being held away
from commercial channels, prices have not dropped further.
"But buyers, knowing that the reserve exists and could be
liquidated, are reluctant to pay more."
Meanwhile, world production "is higher than it would be in
the absence of the price-support activity".
'Main source of
The importance of China in world cotton dynamics underlines
that the cotton market's "main source of uncertainty is the future of Chinese
policy toward the reserve, including how reserve cotton will be handled", the
The comments came as the group trimmed by 300,000 tonnes to
15.3m tonnes its forecast for world cotton reserves at the close of 2012-13, reflecting
a slight dip in harvest prospects, and slightly higher hopes for consumption.