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Market analysis China ready to cut U.S. cotton stocks?

Fundamentals are positive for a pickup in the pace of U.S. cotton exports. According to a market analyst at the Ag Market Network's May teleconference, foreign exporters have finally run out of cotton to ship or are now priced too high.

The United States, with an exportable supply of around 8 million bales, is waiting only for an active buyer.

The big question is when that buyer, China, will start buying. According to Peter Egli, with Plexus Cotton, “domestic supplies in China seem plentiful now, although there are some who believe by June or July, the situation could get tight. If true, then China would have to rely on substantial amounts of imports to tide them over to new crop. They would also start next season with fairly tight stocks.”

According to USDA, China had imported 6.5 million bales of cotton for the current marketing year through March. The figure jumps to 9.5 million to 10 million bales when 1.5 million bales of U.S. sales currently on ships to China are added, along with cotton shipped in April to China and shipments of foreign growths.

This leaves an additional 3 million to 3.5 million bales that need to be bought in the May-July time period (to fill USDA's 13 million-bale import forecast for China in 2006-07). “It's fair to assume that 75 percent to 80 percent of the requirement will have to come from the United States.

“But imports won't stop on July 31, as China will need more cotton in August and September to tide it over to new crop. Since China textile mills consume about 4 million bales a month, by July, we estimate that most of their supplies will have dried up. So a lot of what they need will have to come from imported cotton.”

Egli expects that from May to September, China will buy 4 million to 5 million bales of U.S. cotton, about a million bales a month. “And China is not the only market that will need cotton between now and September. We know that Turkey, Pakistan and Indonesia will still need to buy a fair amount of cotton.”

With about 8.6 million bales of exportable supplies in the United States minus China's 4 million to 5 million bales, and with other markets importing between 3 million to 4 million bales, the expected exports “should take care of most of this unsold position we have in the United States.”

Cotton prices haven't reflected this possibility because the market is still focused on an ending stocks number of 9.5 million bales, Egli said. “However, the number is telling us how many bales are physically located in the United States at that point in time. The market should concentrate on the fact that most of the U.S. exportable supply will have been sold before the new crop is harvested.

“If nearly all them will have a home before October, then I don't think we should be depressed about the 9.5 million-bale inventory number.”

Another question is why the United States has become the supplier of last resort, a situation which has kept U.S. ending stocks high for much of the marketing year.

Egli says the disappearance of the Step 2 payment “has forced the United States to stand last in line in the fight for exports. Until recently, other growths from India and other countries sold their cottons first. They are now basically sold out, or have become expensive, and the United States has moved back into the limelight.

“Many traders feel that it is too little, too late to catch up, and the burden of stocks will depress prices in months to come. However, I'm not convinced that this argument holds true, even if you believe that China will only import 50 million bales this season.”

Egli believes U.S. export shipments should improve sooner than later, “now that the AWP (adjusted world price) blending process has begun. We need about 440,000 bales a week to make our current export forecast, which I believe is possible.” Starting with the May 24 export shipment report, Egli expects shipments to exceed the rate needed to meet the export number.

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