In March, Gong Wenlong, CEO of the China National Cotton Information Center (CNCIC) and director of the National Cotton Market Monitoring System (NCMMS), welcomed Cotton International CEO Gary T. Fitzgerald to his office in Beijing to discuss cotton industry trends in China and the United States:
Compared to the price rally in March 2008, the current historically high prices are less because of speculation and more about cotton market fundamentals, and the same is true in China. Although the ratio of open interest and certified stock is extremely high at present, India’s ban on cotton export has affected Asian textile mills in a great way. This will sustain a tight supply toward the end of this year. Gong noted that slower textile sales, rising stocks and a tightening macro policy have resulted in a restrained cash flow among Chinese mills. The capital outlook may be an offsetting factor for the solid cotton fundamentals in the months to come.
Asked about the future for China textile industry and cotton production, Gong said a NCMMS survey last December indicates a 6.8% increase in cotton area in 2011. Assuming normal yield, cotton output should exceed 7 million tonnes. However, cotton demand is expected to drop due to competition from chemical fibers. The textile industry, which was on the list of industry with excessive capacity during the 11th 5-yr plan, received a boost in investment after the stimulus plan by the government during financial crisis in 2008-2009. With a rising cost of labor and raw materials in the 12th 5-yr period, China’s textile industry will focus on upgrading facilities and products and achieve quality-oriented production systems. The textile industry will not wane in the coming years and will continue to develop in a sustainable way.
Gong said the current price ratio for grain and cotton is too high at 12.5 to 1, up 4 points from a normal level of 8-9 to 1. Compared to early 2010, cotton price has gained 130%, while grain/food price was up less than 30%. Longer term, the central government will continue to favor food/grain production, and cotton acreage will not see major changes. Historically, China’s cotton area stays at 5 to 5.7 million hectares and plantings will be about 5.4 million hectares in 2011. Based on mill consumptions, China’s cotton production should stay at 7 to 7.5 million tonnes. That means China will continue to import 3 to 3.5 million tonnes in the future.
In the United States, Fitzgerald said the supply of U.S. cotton is extremely tight this season, and it is the first time on record that more than 90% of U.S. crop is committed before the new crop is planted. For 2011, he sees great expansion in U.S. cotton acreage. Besides the prospective planting report by USDA, he said Cotton International will also conduct field research to determine planting intentions of U.S. farmers and yields. Although U.S. cotton acreage will increase sharply this year, weather and crop conditions, including drought in the U.S. cotton belt, remain uncertain.
Cotton futures price, according to a latest report by Morgan Stanley, will drift lower from historic highs around $1.90 per pound to less than $1.50 per pound as the year progresses. Fitzgerald said it is by no means a surprise to the market since cotton fundamentals will alter significantly in the new marketing year. Acreage expansion, increased production and competition from chemical fibers will all be undermining the market support.
