Weak premium over polyester ups cotton price hopes

The International Cotton Advisory Committee opened the new cotton season by raising its price forecast, despite the tumble in New York futures, citing the diminished premium over values of artificial fibres.

The intergovernmental group, which in June and July had cut hopes for cotton values in 2014-15, which started on Friday, raised its forecast by 3 cents to 85 cents a pound, as measured by the Cotlook A index of physical prices.

The upgrade came despite a continued decline in prices of New York futures which, for the best-traded December lot, fell 14.5% over July, undermined by prospects of a strong US harvest, and of demand from China, the top importer, being diminished by a change in subsidy policy.

China's previous policy, in offering farmers guaranteed prices well in excess of world market values, had spurred a large build-up in government inventories, while encouraging mills to opt for cheaper imports.

Production forecasts

However, the ICAC, while raising its forecast for the US harvest by 300,000 tonnes to 3.5m tonnes, and lifting its estimate for Chinese production by 200,000 tonnes to 6.2m tonnes, offset the increases with a downgrade to the Indian harvest.

"Although the monsoon has arrived in India, the volume of precipitation has varied widely and yield is likely to suffer in some places," the ICAC said, cutting its forecast for the country's production to "just over" 6m tonnes, from a previous estimate of 6.5m tonnes.

Indeed, the disappointing monsoon appears to have cost India the chance of overtaking China as the world's top cotton grower.

'Situation changed significantly'

And the committee raised its forecast for world demand in the newly-started season by 360,000 tonnes to 24.50m tonnes, citing the boost from a lower premium over artificial fibres, notably over the benchmark of polyester prices.

Cotton prices in the spring built a stiff premium as they rallied nearly to 100 cents a pound, as measured by the Cotlook A, while polyester declined from last year's levels of 74-76 cents a pound to 65 cents a pound.

"However, the situation changed significantly in July, with the Cotlook A index falling to 80 cents a pound while polyester has climbed back up to around 73 cents a pound," the ICAC said.

It also highlighted lower prices in China where, thanks to the change in subsidy policy, prices on the local market have fallen from around 140 cents a pound for most of last season to some 126 cents a pound.

Chinese demand will soar 5% to 7.9m tonnes this season.

Cotton prices

Separately, Rabobank too stressed that "at current price levels, cotton is much more competitive against man-made fibres" as it forecast a recovery in futures to average 73.0 cents a pound in the last three months of 2014, above the level futures are pricing in.

"In the fourth quarter, a seasonal pick-up in physical offtake coupled with the lowest new crop prices of the fibre since 2008 are expected to stimulate demand," the bank said.

New York cotton futures for December stood 1.4% higher at 64.17 cents a pound at 09:30 local time (14:30 UK time).

The Cotlook A index on Friday stood at 72.15 cents a pound.

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