Have some investors been over-gloomy about Chinese cotton imports?
New York futures have fallen more than 4% since China, the top cotton producer and consumer, revealed on Monday that it would not next year be issuing import quota, free of a 40% duty, above the 894,000 tonnes demanded by commitments to the World Trade Organization.
In the past, it has issued extra quota on top – reportedly in the region of 600,000 tonnes - to protect mills from domestic values elevated by a guaranteed price regime for growers, which has now been scrapped in favour of a straight farm payment regime.
But as to whether Monday's move will "fundamentally change the market", the answer is a "maybe", according to Societe Generale, rather than the outright "yes" being touted by some other commentators.
'Some downside risk'
The change is enough to lower value expectations, SocGen analyst Christopher Narayanan said, flagging "some downside risk to cotton prices in the near-term".
Looking ahead, the move had placed a question mark over the bank's expectations of a recovery in values too to an average of 75 cents a pound in the April-to-June quarter of 2015.
However, the risk was in the region of 5-10%, suggesting still that Ice futures prices trading around 62 cents a pound for May and July delivery on Thursday were too downbeat.
Quantity vs quality
The bank cited in part specification concerns, noting that while China has huge stockpiles of the fibre, a result of offering farmers guaranteed prices well above world values, its policies have "encouraged quantity over quality.
"Much of the stockpiled cotton in the last three years does not meet the specifications needed by Chinese textile mills," Mr Narayanan said.
"While limited by the quota, mills may once again try to source external cotton if global demand for finished goods rises more than expected"
In fact, Chinese import demand from the US is running far ahead of that a year ago, although SocGen cautioned against reading too much into data so early in the season, which started last month.
Combined imports and outstanding orders total 672m bales for 2014-15, 43% above the figure of 811m bales a year ago (for 2013-14).
Production shortfall
The comments came as a report in the Chinese press reported an official estimate of 2m tonnes for the shortfall in domestic production, hurt by the shake-up of the farm support programme, behind demand.
Lian Weiliang, deputy head of China's important National Development and Reform Commission, pegged at 6.5m tonnes domestic cotton production in 2014-15, adding that this represented a drop of some 500,000 tonnes, according to the Xinhua news agency.
However, demand will rise by roughly 500,000 tonnes to 8.5m tonnes, according to the report.
The US Department of Agriculture estimates Chinese output this season at 6.53m tonnes, a drop of 218,000 tonnes on its estimates, with consumption viewed climbing 435,000 tonnes to 7.95m tonnes.
China's cotton inventories ended last season at 13.5m tonnes, according to the USDA. Every 1 cent move per pound in cotton prices equates to a change of $22.0 per tonne - or $300m in terms of the value of China's stocks.
