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|Cotton prices - will they fall further in 2013?
By Agrimoney.com - Published 02/01/2013
Cotton futures endured a poor 2012, declining 18%, making the fibre one of the worst performers in the agricultural commodities complex.
Prices were sapped by the building up of world inventories to what is expected to be a record high at the close of 2012-13.
Chinese continued policy of offering farmers a relatively high minimum price for the fibre, even after stockpiling huge amounts of the fibre in 2011-12, muffled signals to producers of the rise in stocks.
Will farmers get the message in 2013? And what will this mean for prices?
"State cotton purchases in China at double the global market price are supporting domestic prices and should replenish stocks in China to a full year's consumption.
"On the other hand, this is harming the profitability of cotton processing in China itself. Many textile companies are therefore increasingly using imported threads.
"China's competitors in the cotton processing industry such as Pakistan, Vietnam, India, Bangladesh and Thailand could increase their shares of the market. Their higher requirements of raw cotton could make up for a part of China's lower imports.
"All in all, the upside price potential is limited in the medium term. That said, a marked reduction of acreage in favour of soybeans is to be expected for the 2013-14 season, given the continued poor performance of cotton prices.
"A much lower supply of cotton could then result in a market deficit for the first time in four years. This should give moderate lift to prices, despite high stocks."
"We remain bullish cotton prices relative to the market, predicting an average price of 80 cents a pound for the 2012-13 marketing year.
"China's reserve policy will likely be the near-term determinant, with the domestic support price suggesting a US cotton price of 90 cents a pound.
"New-crop supply uncertainties will increasingly drive prices as the market focus moves away from a year of good production in the northern hemisphere. Cotton acreage is likely to decline at least 30% year on year in Brazil and Australia in 2012-13.
"China's import demand has largely driven US export sales since the start of the country's 2012-13 reserve purchasing programme in September.
"As China's government continues to scoop up domestic supplies at a minimum support price of 90 cents a pound, industrial users will likely rely more on imports through the end of the marketing year."
"Global cotton prices are forecast to plateau in the first half of 2013 as the market faces its largest ever period of oversupply, before the curve lifts modestly by year end.
"We expect the downside risk to be limited as the ICE#2 cotton futures benchmark represents a segment of US delivered cotton trade, with a minimum base grade of Strict Low Middling with a staple length of 1 2/32 inches, which has a tighter stocks position than the market in its entirety.
"Global cotton area harvested is expected to contract 6% in 2012-13 and a further 9% in 2013-14. However, this is not substantial enough to limit production and erode ending stocks.
"We anticipate that domestic price support schemes and government purchasing in China and India will limit the extent of area downgrades in cotton crops – limiting the market's ability to force a much-needed widespread reduction in production and erosion of ending stocks.
"Supply pressures continue to drive our neutral-to-bearish cotton price forecast, while ongoing macroeconomic uncertainties will weigh on the cotton market due to its discretionary nature during 2013.
"However, with around 46% of global ending stocks located in China, the policies and interventions of the Chinese government remain the wild card for cotton prices."
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