April 2016 Market Summary
International cotton prices advanced during April, influenced by gains in New York. The Cotlook A Index began the period at a low point of 66.40 US cents per lb, and reached 71.70 cents per lb on April 28, representing its highest value so far in 2016.
For most of the period, mill demand remained subdued, and was concentrated mainly on cotton available nearby. Spinners remained reluctant to cover further forward, despite evidence that current crop supplies from some major Northern Hemisphere export origins are becoming increasingly tight, particularly in the more desirable qualities. Accordingly, replacement costs at the origins in question presented a firm appearance firm throughout the month. Firm prices were paid by the international trade at origin sales tenders for what remained of the African Franc Zone crops. On India’s domestic market, asking rates for Shankar-6 reached several fresh seasonal highs during the period. The advance of Brazil’s Esalq Index of spot values reflected a dwindling uncommitted supply.
In addition to difficult trading conditions in cotton yarn, spinners’ adherence to a hand-to-mouth policy was frequently attributed to apprehension with regard to the potential impact on prices (for raw cotton or cotton yarn) of the impending commencement of Chinese state reserve sales. April saw confirmation of the outstanding terms pertaining to the impending auction process, including the start date (May 3), the volume to be made available (two million tonnes) and the formula for calculation of the auctions’ base price. This last value is based on an average of the previous week’s domestic and international price indices (the Cotlook A Index, China Cotton Index and CNcotton B Index). All cotton offered (some has been in warehouse for a considerable time) is to be reclassed, and premiums and discounts are to be applied to the base price, according to the China Cotton Association, schedule of value differences.
The huge unsold stocks held in China’s state reserves, estimated at roughly eleven million tonnes – equivalent to nearly half of global consumption annually – are a legacy of the cotton policy in force between 2011/12 and 2013/14. During those three seasons, the state reserve absorbed virtually the entire domestic crop, while imports were sanctioned on a scale well above the country’s apparent requirements. Previous efforts to dispose of the stocks have met with limited success. Most recently, in July and August of last year, a meagre 64,000 tonnes or so were placed with spinners, from the volume of two million tonnes earmarked for sale. The impression gained as the next auction series approached was that a determined effort will this time be made to engineer a more active mill participation.
Import policy has placed a part in that process. As a result of Beijing’s policy of restricting import quota to the 894,000 tonnes of Tariff-rated quota during 2015 and 2016 (plus modest quantities imported into ‘free trade’ zones), Chinese imports have fallen well below the quantities recorded in recent seasons. Customs data for March indicate imports below 58,000 tonnes, which brought the cumulative total for the first eight months of the (August/July) international cotton season to 644,000 tonnes. During April, Cotton Outlook’s forecast for 2015/16 was reduced by 100,000 to one million tonnes, the smallest import volume since the 2002/03 season. Based on Cotton Outlook’s current supply and demand statistics for China, it would appear that a shortfall in excess of one million tonnes will need to be filled with cotton from the state reserves.
As offering rates increased during April, in sympathy with the recovery in New York futures, US export sales reports released presented a slower appearance. Upland export sales registered during the week ended April 21 marked in a marketing-year low of less than 49,000 running bales. However, shipments have maintained a fairly robust pace, and displayed a marketing-year high in the first report released during the period. Hence, USDA’s forecast for the season (9,500,000 bales of 480 lbs) still appears achievable. The discrepancy between cumulative sales during this season and last continued to narrow during April, but remained substantial at the end of the month, at 2.37 million bales.
Turkey has this season been the second largest buyer of US cotton marginally behind Vietnam), despite the threat of anti-dumping duties, as recommended by an investigation initiated by the government in October 2014, and which reported in February of this year. On April 17, it was confirmed that all shipments of US cotton to Turkey would be subject to a three percent duty. The US cotton industry apparently intends to seek withdrawal of the duties, but for the time being any Turkish spinners importing US cotton will be required to absorb the levy. Imports of US fibre during March amounted to over 40,000 tonnes, reflecting the efforts of mills and shippers to secure the execution of contracts prior to the imposition of the duties. By the end of April, this season’s US export sales to Turkey stood at 1.38 million running bales (about 314,000 tonnes), of which 331,500 (75,000) remained to be shipped.
The attention of the trade is turning to next season’s crop prospects, and sowing is already under way across much of the Northern Hemisphere. Cotton Outlook’s forecast of world cotton production during the 2016/17 season is not greatly altered on the month, but changes for individual nations have not been insignificant. Taking all adjustments into account, this month’s figure is marginally lower than that indicated at the end of March, and 1.9 million tonnes higher than the figure for 2015/16. Cotlook’s broad assumption remains that although planted area is not likely to alter greatly, yields in some major producing countries can be expected to stage at least a partial recovery, following difficult growing conditions and the prevalence of pest attacks experienced in 2015/16. Cotlook’s number for the current 2015/16 season is now placed at 20,835,000 tonnes, representing the smallest crop since 2002/03.
Area in the United States, which is forecast to increase, is the major exception to the above mentioned stability in acreage. Cotlook has adopted the Prospective Plantings estimate released by USDA at the end of March, which implies an increase of around 11 percent on the current season. As a result, our US production figure has been raised by 157,000 tonnes, to 3,281,000. Output forecasts have been reduced in Brazil and China, by 100,000 tonnes and 80,000, respectively.
Global consumption has also been lowered, owing mainly to decreases for China and Uzbekistan. However, an increase on the current season, albeit modest at just 1.4 percent, remains in prospect. World stock levels are therefore expected to fall modestly, with a significant decrease occurring in China, but an increase in the rest of the world.