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India to overtake China as top cotton grower

The International Cotton Advisory nudged higher its forecast for cotton prices next season, forecasting a deeper drop in Chinese output than many investors enough to lose the country its place as the top producer.

The ICAC, in its second estimate for cotton prices in 2014-15 nudged its forecast higher by 1 cent to 89 cents a pound.

The forecast refers to the Cotlook A index of physical values which typically trades a little higher than futures, currently by a little over 1 cent a pound to the spot New York contract.

The ICAC forecast is substantially higher than futures are pricing in for next season, with the highest value contract, for December 2014 delivery, trading at 83.71 cents a pound on Friday.

Subsidy reforms

The revision came as the ICAC trimmed by 170,000 tonnes to 20.87m tonnes its forecast for world stocks at the close of 2014-15, if still enough to represent an all-time high by a margin.

The downgrade reflected a weaker estimate for production, now seen falling 540,000 tonnes to 25.16m tonnes year on year.

And that decline is down in the main to China, thanks to a shake-up of the government subsidy schemes which, in a pilot programme, is offering support only to growers in Xinjiang, the top growing province.

"Most of the decline in world production will occur in China, where production is expected to decline by 10% from 6.7m tonnes in 2013-14 to 6m tonnes in 2014-15," the ICAC said.

"As the Chinese government has restricted its support for cotton to just the Xinjiang region, area outside is expected to fall significantly."

China vs India

At 6m tonnes, China would lose its rank as the world's top producing country, falling behind India, for which the ICAC forecast output coming in at 6.3m tonnes.

That in itself is a 2% fall year on year, reflecting an expectation "that the monsoon weather will not be as favourable as in 2013-14".

Meteorologists expect an El Nino weather pattern to develop this year, which is linked to drier weather in much of Asia.

India's meteorological department has forecast a 56% chance of monsoon rains falling below the average, compared with a 35% probability of normal monsoon.

China has not produced less cotton than India since 1962, according to records from the US Department of Agriculture, which has itself pegged Chinese output this year at 30.5m bales (6.6m tonnes).

'A lot of damage has been done'

However, the ICAC forecast China retaining its place as the world's top consumer.

Indeed, the subsidy reforms will put the brakes on a decline in China's cotton demand, expected to slow just 1% to 7.8m tonnes in 2014-15, after tumbling by 17% since the country in 2011 introduced the subsidy scheme now being phased out.

This regime offered a guaranteed government price, far above the world market rate, encouraging farmers to sell to the state and raising the domestic cotton price to an extra that Chinese mills were rendered uncompetitive.

"Although lower cotton prices are welcomed by the mills in China, a lot of damage has been done to the industry in the past few years by the Chinese government's cotton policy," the committee said.

Import estimates

The ICAC also estimated Chinese much-watched cotton imports - the world's biggest - at 2.2m tonnes in 2014-15 a drop of 30% year on and year, and 60% below the record two seasons ago.

The USDA has forecast China's imports next season at 8.0m bales (1.7m tonnes).

Chinese buyers have so far bought 102,500 bales of US cotton ahead for 2014-15, above the 80,600 bales purchased forward at this time a year ago. 

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