By Leslie Josephs
NEW YORK--The Chinese government is planning to sell part of its massive stockpile of cotton this week, an event long anticipated by traders of the fiber.
But while such a large sale would usually push down international cotton prices, concerns over the quality and price of the fiber for sale is expected to mute the effect.
The government plans to sell the cotton via auction starting on Thursday with a minimum price of 18,000 yuan a ton, equal to about $1.34 a pound, according to a notice posted on government cotton-industry website Cncotton.com.
Previous cotton sales have had only limited success. The China National Cotton Reserves Corporation held daily auctions from January through July this year, but mills bought just 25% of the cotton offered because of the high prices the reserve wanted, traders said.
Thursday's auction price is about 68% higher than the current benchmark of U.S.-cotton futures. At midday Tuesday, cotton futures were trading around 79 cents a pound.
In addition, the China National Cotton Reserves Corporation said it will sell cotton from the 2011 crop, raising concerns about the quality. Older cotton can grow brittle in storage, making it more difficult to spin into yarn and dye.
"I don't think [the auction is] a game changer" because of the quality, said Gary Raines, an economist at brokerage INTL FCStone. "You could have a Ferrari in the driveway [and] you can come back in 15 years to drive it, but don't expect it to be the same Ferrari."
Traders and analysts said they had been expecting China to release some of its reserves before the end of the year, a prospect that sent cotton prices to a nine-month low in early November. China's reserves total about 10.3 million metric tons, according to the International Cotton Advisory Committee, a Washington-based group that advises cotton-growing countries. The reserve is equal to about 40% of global production last year, according to the U.S. Department of Agriculture.
But cotton traders and analysts largely shrugged off China's announcement.
"The focus is on the U.S. weather," said Kona Haque, head of agricultural commodities research at Macquarie Bank.
A large storm passed through the eastern U.S. on Tuesday, after dumping snow on growing areas in Texas, the country's top cotton-producing state. Cotton for March delivery on the ICE Futures U.S. exchange rose to a one-month high of 79.65 cents a pound in early trade Tuesday.
"There are some concerns how much quality will be impacted from the ongoing wet weather," said Sharon Johnson, a senior cotton specialist at KCG Futures. "Yields could suffer as well depending on the extent and length of adverse conditions."