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China cotton futures purchases add to market uncertainty

Chinese contracts have been purchased covering more than 361,000 bales of US cotton for 2019-20

Cotton industry analysts say the clothing industry should not overreact to a major hike in Chinese cotton futures contracts after years of stockpiling the fibre by China buyers – even though they accept market uncertainty has been driving up prices.

Contracts have been purchased covering more than 361,000 bales of US cotton for 2019-20, according to US Department of Agriculture data, which "would be enough to make 400 million T-shirts," the Wall Street Journal calculates. It adds: "China has never booked that much cotton that far in advance at this time of year, in data going back to 1998" and has now become a "major consumer" of US cotton.

Coupled with ongoing drought conditions in the key cotton production area of Texas, the move has pushed prices up to a six-year high, it reported.

Indeed, prices as measured by the Cotlook A index were near 94 cents/lb a month ago – while the latest values have been over 100 cents/lb, marking the first time since March 2012 that the A Index has been over a dollar, according to Cotton Incorporated.

However, the North Carolina based international research body advises the clothing industry not to overplay the significance of the Chinese deals.

The projected exports of US cotton for the current crop year (2017/2018) are 11.6m bales; putting the volumes in question at just over 3% of total US cotton exports.

"To put it in perspective, during a one-week period earlier this month [June], the US exported 600,000 bales to countries around the world, including China," a spokesman told just-style.

Moreover, trade tensions between Beijing and Washington could impede future commerce, with the Chinese government announcing 25% duties on uncombed cotton from the US on Saturday (16 June) as a response to US President Donald Trump announcing a raft of new tariffs on Chinese imports a day earlier.

However, these actions are deepening market uncertainty.

China sharply reduced its imports from all origins in recent years as it encouraged domestic mills to use government-controlled reserve stocks over imports. However, given the drawdown in reserve stocks over the past few years, China is at the point where it needs to begin to import significantly more cotton.

A separate note published by Cotton Inc earlier in June stresses the fact the Chinese government has also reported "that plans are in place to increase import quota, with officials indicating that sliding-scale quota can be released in the near future," would play a crucial role in determining the course of next crop year's cotton market.

"These comments highlight a central source of uncertainty for the global cotton market during the 2018/19 crop year, which is how much more China cotton may import. With dry conditions affecting the largest growing region of the largest exporting country (West Texas, US), the possibility of stronger than forecast Chinese imports underline the possibility of lower than expected ending stocks outside of China," said Cotton Inc.

The latest US Department of Agriculture (USDA) foreign agricultural service data shows the US 2018-19 season-average farm price for cotton stands at US$0.70 cents per pound following what it describes as "substantial developments comparatively late in the marketing year."

For 2018/19, production is forecast down, with declines for China, Pakistan and Australia partially offset by an increase by Brazilian producers. Consumption and trade are forecast effectively unchanged.

"The A-index and the spot price have both risen appreciably in recent weeks, continuing a 3-year upward trend," the USDA report said, suggesting it was influenced by rising global demand and "speculation regarding possible release of additional import quota for China."

China itself is facing a decline in harvest expectation from 27m bales in 2018/19 to 26.5m, Cotton Inc noted.

Brant Wilbourn, associate director, commodity and regulatory activities, Texas Farm Bureau, adds: "Of course the increase in demand for cotton is great for producers and should help their bottom line, but they need some rain as well. As for clothing prices, that's going to depend on different things from the mill level on up to retail."


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