Cotton futures nudged higher, taking New York's best-traded May lot back close to contract highs, after a poll boosted expectations of a decline in sowings this year, offsetting a barrage of cautions over high prices.
China's cotton farmers, the world's top producers of the fibre, will cut plantings for a third successive year in 2014, and by 10.7%, the China Cotton Institute said following a survey of nearly 3,500 growers.
The decline in area - suggesting a figure equivalent to roughly 550,000 hectares, or more than 1.3m acres – is bigger than the 8.9% drop forecast by the China Cotton Association.
'Major negative impact'
The extent of the drop reflects a decline in profitability from growing the crop estimated at 19.4% last year, and uncertainty over a change by Beijing to its cotton subsidy programme, which is to switch from offering guaranteed cotton prices to direct support.
"The end of the policy causes a major negative impact on growing in the areas along the Yangtze and Yellow rivers," the institute said,
The policy has given growers prices well above those in the international market – although this has come at a cost in terms of leaving domestic mills struggling with particularly high domestic cotton costs, while prompting a surge in China's cotton inventories.
China will hold cotton stocks of 11.5m tones at the close of 2013-14, according to the International Cotton Advisory Committee - equivalent to 58% of the global total, and enough to keep all the world's mills in supplies for nearly six months.
'Pressure on global prices'
Indeed, the prospect of a change in China's guaranteed pricing policy, which has been seen as propping up values worldwide, has attracted a rash of cautions from analysts, with the ICAC itself warning that "given China's share of world cotton stocks, if it decides to offload its reserve stock onto the market, price is expected to decrease".
Furthermore, the country, the top importer, will likely extend a decline in imports, a dynamic expected by US Department of Agriculture analysts, after a decline of 19.2% last year.
Rabobank cautioned that China's "demand for imported cotton is expected to decline in 2014, which is likely to put some pressure on global prices going forward, most likely into the second half of 2014".
Indeed, New York's December cotton contract, while trading up 0.2% at 77.80 cents a pound on Tuesday, remained more than 12 cents behind the old crop May lot, which stood up 0.3% at 89.31 cents a pound, within $0.40 of its contract high.
'Swimming in cotton'
Nonetheless, prices even at around 78 cents a pound represent attractive levels by historical standards, and especially compared with grain values, which have fallen significantly thanks to decent crops in 2013-14.
This factor may encourage a rash of sowings outside the US, the top exporting country, where plantings could rise by some 1m acres to 11.3m acres, or more, according to Judith Ganes-Chase, the respected soft commodities analyst.
"Right now cotton wins the race with better prices than other competing farm crops and could easily pick up additional acreage that may not be needed," she said
Factoring in improved yields above recent drought-affected results could take output to 17m-19m bales, raising the potential that "the market will find itself swimming in cotton it does not need".
"The market runs the risk of building an acreage base that will be much too high relative to needs."
She was backed by Commerzbank, which said that a "sharp increase in US acreage, coupled with high worldwide reserves and a switch in Chinese cotton policy, is likely to put strong pressure on prices in the medium term".
