Cotton markets are still facing the question of what actions China will take to draw down its massive state inventories of the fibre, according to analyst Judith Ganes-Chase, with not much room for the upside in an environment where demand is still uncertain.
China is the world's largest cotton consumer, but years of government price support have left a large domestic industry, and massive government reserves.
And as the cost of supporting those stockpiles mounts, Chinese officials may be forced to take action.
Magic wears thin
Ms Ganes-Chase says there is no "screaming reason" for cotton futures to move from the current trading range of 60-70 cents a pound.
Cotton prices soared on the low US cotton forecast issued by the US Department of Agriculture (USDA) last month, but Ms Ganes-Chase notes that "the magic generated around these numbers wore thin and prices retreated nearly right back down to the lows" shortly afterward.
This month's figures, out on Friday, are unlikely to spark the same result, Ms Ganes-Chase said.
"If anything, my concern would be that estimates prior to the August USDA release […] will ultimately prove correct," she said.
Slow exports
Cotton export sales from the US have been slow so far this season, and weak Chinese economic prospects could push them down further.
And Ms Ganes-Chase notes that although demand from consuming countries is usually correlated with GDP synthetic fibers are also winning market share from natural cotton.
"In an uncertain sales climate, buyers are also likely to shed inventory and keep stocks leaner which also helps to reduce purchases and keep demand at bay," Ms Ganes-Chase added.
Chinese stocks
"The market is still left grappling with the issue of how much and when will China try to unload their vast supply," said Ms Ganes-Chase.
The Chinese government has been attempting to draw down its massive cotton inventories, but a reluctance to flood the local market means the government is offering low-quality cotton at far from bargain prices, and purchaser interest has been extremely muted.
"After a two month series of auctions to unload the cotton only 3.4% of what was offered actually sold, which leaves the market wondering and also those within China how to dispose of the supply if auctions aren't going to work?" Ms Ganes-Chase notes.
Rising consumption
The USDA on Wednesday forecast Chinese cotton consumption to rise for the first time in six years in 2015-16.
Consumption was seen at 34.5m bales, up 0.5m bales from the previous year.
But with government stocks at an estimated 11m bales, that rise in demand will take a long time to chip away at the surplus.
Inventory drawdown
Assuming production cutbacks and modest demand growth, China could clear its stocks in around 5 years, Ms Ganes-Chase said.
"If demand were increasing regularly than so too would the amount of stocks necessary and at some point the vast supplies no longer represent an overhang," she said.
But with a contraction in mill demand, it appears that the stock overhang, as a percentage of domestic consumption" is getting "weightier not lighter," Ms Ganes-Chase said.
This intractable surplus "may force Chinese officials to come to some policy decisions sooner rather than later," said Ms Ganes-Chase, pointing to the cost of carrying the stockpiled product.
