From the August Edition of Cotton Leader:

After holding to values near 85 cents/lb for the past five weeks, the most-actively traded December futures contract increased to levels between 88-92 cents/lb in the most recent data. The A Index increased slightly, rising from values near 91 to those around 94 cents/lb. Chinese prices (CC Index) were marginally lower in local terms (from 19,270 to 19,200 RMB/ton) and stable in international terms (142 cents/lb).

The most significant revisions to supply, demand, and trade figures in the latest USDA report involved production figures. Expectations for the 2013/14 crop dropped 1.6 million bales, from 118.0 million to 116.4 million. Most of the global reduction was a result of a 1.0 million bale decline in expectations from China. At the conclusion of the current 2013/14 crop year, it is expected that the world will have 93.7 million bales of ending stocks.

If realized, this will be the highest volume ever, exceeding the previous record of 86.3 million bales (2012/13), by 7.4 million bales or by nearly 10%. Relative to ending stock levels near 60 million bales, such as those which were considered high before the 2010/11 spike in cotton prices, the 2013/14 forecast is more than 50% higher.

The existence of record stocks promises eventual downward pressure on prices. For the past two crop years, the Chinese reserve system prevented a collapse in world prices by serving as a major buyer. During the September to March purchasing period, nearly 90% (30.4 million bales) of the 2012/13 Chinese crop (35.0 million bales) was purchased.

In a series of recent conferences, Chinese officials indicated that Chinese cotton policy will be revised before the onset of the 2014/15 crop year. Comments indicated that the accumulation of stocks is unsustainable. Correspondingly, the cotton held in reserves may be more aggressively marketed to mills in the upcoming crop year, Chinese import demand may slow, which could push prices lower.