Weak demand growth, low manmade fiber prices and the pressure of China’s surplus disposal policies expected to weigh on world cotton prices in 2016-17, USDA says. ChinaΆs million-bale increase expected to account for the entire gain projected in world cotton consumption.
Cotton futures matched the contract low in most-active May, slipped to new lows in July and December and settled on modest losses Friday as traders continued to digest USDA forecasts for 2016-17.
- May closed down 23 points to 57.53 cents, just below the midpoint of its narrow 63-point range from up 13 points at 57.89 to down 50 points at 57.26 cents. It bounced off the low, reaching 57.87, and then chopped back and forth into the close.
- Maturing March closed down 24 points to 57.92 cents, July settled down 28 points to 57.33 cents and December finished down 31 points to 57.09 cents. For the week, the market lost 209 points in March, 201 points in May, 235 points in July and 247 points in December.
- Volume slowed to an estimated 18,476 lots from 20,054 lots the previous session when spreads accounted for 7,731 lots or 39% and EFP 12 lots. Options volume totaled 1,052 calls and 2,530 puts.
Larger sales from ChinaΆs cotton reserves are expected in 2016-17 based on a widening production shortfall as well as unofficial indications that sales prices may fall, USDA said in a report at its Outlook Forum.
The USDA estimates China will hold 49 million bales in its national reserve at the beginning 2016-17, nearly half of world stocks, and will have 43 million bales in that stockpile at the end of the season.
This assumes ChinaΆs policies will remain largely unchanged, resulting in lower production and continued import restrictions on the supply side, while the current lower domestic prices and initiatives to support spinning in Xinjiang boost demand.
Significant exports arenΆt projected because ChinaΆs internal prices still arenΆt likely to be competitive with world prices. Also, China hasnΆt indicated exports are a goal, possibly because of potential trade policy issues associated with exporting heavily subsidized cotton.
In this policy framework, USDA sees a potential for China to reduce overall stocks by an additional 8% to 59.1 million bales following an estimated 5% drawdown to 64.5 million for 2015-16.
ChinaΆs production is forecast to decline 4.2% to 22.8 million bales in 2016-17, consumption to rise 3.1% to 33 million bales and imports to remain at 5 million bales. The increase in ChinaΆs mill use would be the first since 2009-10 when it hit a record 50 million bales.
Outside China, USDA expects no net growth of cotton consumption in 2016-17. ChinaΆs increase of a million bales is projected to account for the entire gain in world consumption next season.
Strong competition from polyester continues to constrain global cotton demand. Cotton prices this season have been higher than polyester prices than any time since 2011, despite declining in absolute terms.
The relationship rose last month to a level previously seen only during the price shock of 2010-11 and before that in 1977. In January 1977, the cotton-polyester ratio of 1.564 was marginally above the January 2016 ratio.
However, the corresponding Cotlook A Index of world cotton values in 1977 was 89 cents per pound, compared with 69 cents last month, indicative of substantial structural change in world fiber and agricultural markets.
The USDA projected the A Index to average 67 cents in 2016-17, 2 cents below the 2015-16 estimate, as continued weak demand growth, low manmade fiber prices and the pressure of ChinaΆs surplus disposal continue to weigh on world prices.
Futures open interest expanded 1,451 lots Thursday to 194,758, with MarchΆs down 52 lots to 426 and MayΆs up 3,443 lots to 121,413. Cert stocks grew 3,450 bales to 66,104. Awaiting review were 9,274 bales.
