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China’s residual factor is a heavy load

Cotton industry market analysts were encouraged recently by a Chinese attaché report projecting significant imports for China for 2007-08. But unfortunately, the report’s credibility “seemed to go out the window when USDA discounted the information” (in its May 11 supply and demand estimates), said one analyst.

An attaché report filed on May 3 by the Foreign Agricultural Service in Beijing, projected numbers for Chinese production, imports and consumption that ended significantly different from the final USDA supply and demand projections filed eight days later.

Conspiracy theories aside, here are a few differences.

The attaché report projected Chinese production at 29.79 million bales for 2007-08, a 4 percent decrease from the record 30.9 million bale crop of 2006-07. USDA’s supply and demand estimate projected Chinese production for the coming year at 31 million bales, a record, and a 1.21 million-bale difference from the attaché guess.

The attaché report projects Chinese cotton consumption at a whopping 56.4 million bales for 2007-08, compared to USDA’s 54 million bales. Either figure is astounding, but the difference of 2.4 million bales, added to the lower production takes 3.5 million bales off the books in China.

The most surprising figure in the attaché report has China importing almost 23 million bales of cotton in the 2007-08 marketing year. USDA has them importing 17 million bales, a nearly 6 million-bale difference.

The difference may or may not be attributable to China’s residual factor, a number USDA adds to supply whenever China’s buying behavior indicates adjustments in stocks are necessary. Usually, there is a reasonable explanation — production is higher and/or consumption is lower than reported.

The number, which is also 6 million bales, “took the bloom off the potential positive side of the reports,” said Mike Stevens, with Swiss Financial Services.

The differences in the numbers point not to a conspiracy, but the extreme difficulty of estimating China’s supply and demand situation. According to the attaché report, China still has not established an official cotton market information system and is unlikely to do so in the foreseeable future. In fact, there has been no reliable stocks data since the liberalization of cotton marketing in 1999.

This lack of good data is particularly true for recent years, when the Chinese cotton industry expanded rapidly, the report says. The numerous players and diversified ownership in the industry chain, including gins, merchants and mills, make collecting reliable production statistics extremely difficult.

Cotton market analysts agree that a turnaround in the cotton market is coming — the question is when. According to Carl Anderson, “This might be an excellent time for producers, particularly those who have not planted cotton on their cotton base acres, to look very hard at buying some 56-cent December calls to protect against a turnaround in this market.”


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