A series of reforms in China designed to open up the economy to private investment and speed up urbanization likely will accelerate reduction of the cotton area, ICAC says.

Cotton futures settled lower in light dealings and a holiday-like atmosphere Tuesday, unable to sustain upside momentum from the prior dayΆs strong finish.

Benchmark December settled down 82 points at 84.72 cents, in the lower quarter of its 104-point range from up four points at 85.58 cents to down 100 points at 84.54 cents. March closed off 29 points to 83.53 cents.

Strength in the dollar amid geopolitical concerns and a downturn from earlier gains in U.S. equity markets may have contributed to negative sentiment in cotton futures.

Volume slowed to an estimated 12,200 lots from 15,738 lots the previous session when spreads totaled 1,663 lots or 11%, EFS 8 lots and EFP 2 lots. Options open interest totaled 5,370 calls and 1,962 puts.

A series of reforms initiated by the new administration in China designed to open up the economy to private investment and speed up urbanization likely will accelerate reduction of the cotton area, says the International Cotton Advisory Committee.

The PeopleΆs Bank of China in June said the government was willing to tighten monetary policy to achieve more stable economic growth, ICAC noted in a monthly report.

This had an immediate impact on spinners who are reducing purchases from the reserve, which requires payment upon delivery, and expanding imports with 90-day letters of credit, ICAC said.

“All in all, ChinaΆs cotton policy remains the driver of world cotton prices,” the secretariat added.

ChinaΆs national cotton reserve is estimated at close to 9 million tons (41.34 million 480-pound bales) at the end of June, ICAC said, and may be down to 8 million tons (36.75 million bales) by the end of July. Purchases into the reserve will resume in September as the harvest begins.

With the recent acknowledgement of the market distortion created by its national cotton reserve programs, Chinese policymakers already are planning to experiment with a subsidy in Xinjiang, the major cotton-producing province.

At the provincial level, in an effort to stop the rapid decline of cotton planting in Hebei, cotton farmers were paid a direct subsidy in April, ICAC said.
Since 2010-11, world cotton production has exceeded consumption. While 2012-13 global ending stocks are expected to be approximately split evenly between China and the rest of the world, China is projected to hold close to 60% of the world stocks by the end of 2013-14, ICAC said.

In its updated 2013-14 supply-demand estimates, converted to 480-pound bales, the ICAC shaved its world carryout forecast by 590,000 bales from a month ago to 85.02 million, up from 82.13 million in 2012-13.

World production prospects dipped 640,000 bales to 114.60 million and the mill use outlook edged up 100,000 bales to 111.75 million, down from the prior seasonΆs 121.21 million bales and up from 109.22 million bales, respectively.

Global trade is estimated up 830,000 bales on the month to 42.35 million, down from 44.97 million in 2012-13.

Futures open interest expanded 943 lots Monday to 157,422, with JulyΆs down 45 lots to 1,803 and DecemberΆs up 1,021 lots to 138,989. Except for mere 43-lot increase last Wednesday, open interest had declined every session since June 12.

Certificated stocks grew 394 bales to 623,861. There were 62,879 bales awaiting review.

World values as measured by the Cotlook A Index gained 140 points Tuesday morning to 92.70 cents. The index premium to MondayΆs futures settlements narrowed 18 points to 8.41 cents to July and 13 points to 7.16 cents to December.