Cotton stockpiles in China, the worldΆs biggest importer, are set to climb to about 9 million metric tons this season, enough to cover the countryΆs deficit for the next six years, according to Allenberg Cotton Co.
Inventories are rising as the government boosts purchases to support domestic prices and lift farmer incomes, Joe Nicosia, chief executive officer of worldΆs largest cotton trader, said at a conference in Hong Kong today. The country may buy 5 million tons for reserves this year, up from 3.2 million tons a year earlier, he said.
“As long as China maintains this regime to subsidize cotton farmers, the world will be prone to overproduction,” he said. “Can you imagine a world without China importing any cotton for six years? They hold all the cards.”
Cotton plunged 68 percent from a record last year as farmers expanded output. Global stockpiles will reach a record 16.4 million tons in the year started Aug. 1, increasing 17 percent from a year earlier, according to the International Cotton Advisory Committee. The slump in prices has curbed costs at companies such as Levi Strauss & Co. and Gap Inc. (GPS)
“Outside of China the world has 13.9 million bales of surplus,” said Nicosia, who is also executive vice president of Louis Dreyfus Commodities BV. “How much of this surplus China decides to absorb will determine the cotton marketΆs direction.” Each bale weighs 480 pounds (218 kilograms).
Poor Performer
Global stockpiles may total 79.11 million bales on July 31, up 14 percent from a year earlier, the U.S. Department of Agriculture said Oct. 11. China will import 11 million bales, down 55 percent from last year, as its inventories climb 21 percent to 36.61 million bales, the agency said.
Cotton, which reached a record $2.197 a pound in March 2011, is the worst performer this year after arabica coffee among the 24 commodities tracked by the Standard & PoorΆs GSCI Spot Index. Futures traded at 70.39 cents on ICE Futures U.S. in New York today, down 23 percent in 2012. Imports by China become viable if prices drop below 68 cents, even with a 40 percent duty, said Nicosia.
As long as the nation curbs access to competitively priced cotton, consumption growth will shift to other Asian countries, he said. China needs to sell its reserves “at competitive prices or risk losing its domination of the worldΆs textile industry and the jobs associated with it,” he said.
Cotton consumption in China will drop for a third year in 2012-2013, declining 5.3 percent to 36 million bales, after a 17 percent plunge a year earlier, the USDA estimates. Domestic use has slumped 28 percent since 2009-2010, agency data show.
“IΆm hopeful that the Chinese mills can gain access to more competitively priced cotton so they can increase consumption and get the cotton-polyester blend back,” said Nicosia in an interview at the conference. “Millions of bales of demand were lost to the man-made fiber. It will take a period of years in order to get that back.”