Cotton Likely To Stay Under Pressure Through H2 And Into 2012.

With the global market reverting to a surplus, Barclays believe that the Cotton prices are likely to stay under pressure through H2 and into 2012 reflected in an increasing inability to hold the $1/lb level.

After a stellar performance through 2010, culminating in all-time highs set in March 2011, the decline in cotton prices has been equally stark. A high price environment has had a two pronged effect – global supply has grown markedly, but demand has come under pressure with competition from man-made fibres.

Prices rose to a series of all-time highs, peaking at $2.27/lb in March, then more than halved to the year’s low so far, of 93.5 cents/lb in July. Barclays had been forecasting a decline in H2, but the magnitude of price falls has been steeper than expected.

Supply has rebounded in response to elevated prices and will take the cotton market into a surplus after recent deficits. Across key producers, only US production is estimated lower y/y despite a large rise in planted acres, due to the drought in Texas leading to poor crop ratings and record levels of abandonment. Demand has eased in response to high prices.

China’s cotton imports in June came in at their weakest level since October 2010 and, despite a rebound in July, YTD are down over 13% y/y.

However, fundamentals do not bode well and Barclays anticipate further easing in prices from Q4 into early 2012, with prices increasingly unable to hold the $1/lb level. Tactical investors have viewed ICE cotton positively; non-commercial CFTC net fund positions have stayed in positive territory since April 2009 but net fund length has declined from September 2010’s level of 55.9K lots (the highest level since March 2008), falling to 19.7K lots in end-April (the lowest level since July 2010). Net fund length has increased since, and at 31.8K lots in end- July, it now comprises 23% of open interest – the highest level since September 2010.

In marked contrast to 2010-11, when the production outlook was marred by downward revisions due to the floods in Pakistan, lower Chinese production and India’s temporary export suspension followed by an export quota, unsurprisingly supply in 2011-12 has rebounded in response to the elevated price environment and will take the cotton market into a surplus after recent deficits.

The USDA estimates global production for 2011-12 at 122.7mn bales, up 7% y/y, with South Asia the source of the largest y/y growth in production, with a record crop forecast in India and Pakistan’s production rebounding after last year’s floods. Across key producers, only US production is estimated lower y/y despite a 25% y/y increase in plantings at 13.7mn acres (their highest level since 2006), with the hot weather and drought in Texas (which comprises half of US production) cutting harvested acres markedly and leading to high levels of abandonment. Weekly US crop ratings data have highlighted the dire shape, with currently 40% of the US Cotton crop rated poor/very poor (compared with 9% last year), while 57% of the crop in Texas is rated poor/very poor at the time of writing.

Meanwhile, India (the world’s second largest cotton producer) is estimated to have a record crop in 2011-12, although any marked rise in exports is likely to be curbed by domestic demand. Indian production was strong in 2010-11 as well: in mid-April 2010, India suspended fresh exports of cotton for a month and then put in place a 5.5mn bale export quota, which has only been removed in early August this year.

Chinese effect

After weak domestic production in 2010-11, Chinese plantings have risen markedly in 2011-12, with high prices eliciting a strong supply response and Chinese farmers increasing their cotton and Corn plantings at the expense of soybeans. The USDA estimates 2011-12 Chinese production at 33mn bales – a two-year high. China has also announced that it will buy cotton from farmers, with the new stockpiling plan to come into effect on 1 September, with the price set at 19,800 CNY/t. On the demand front, China Customs trade data for 2011 so far has reflected weakening Chinese imports. Imports have been falling through the year and from March onwards reflect successive monthly declines. China Customs trade data showed that China’s net cotton imports in June at 119Kt were at their lowest level since October last year.

While preliminary July China cotton trade data revealed a bounce higher in imports, YTD imports are down over 13% y/y. While imports have been weak over recent months, Chinese imports in 2011-12 are estimated at 15mn bales by the USDA – the second highest on record after 2005-06’s all-time highs. With China announcing its latest cotton stockpiling programme, imports are likely to post modest gains although the demand outlook will also be driven by the broader macro-economy and may imply downside revisions to China’s cotton import demand.

The USDA’s August WASDE report made downward revisions to global cotton use, especially in countries active in global textile trade such as China, India, Bangladesh and Turkey. Further, macro-economic uncertainty and lower economic growth is likely to impact cotton demand more than other agricultural markets, thereby more than offsetting any firming in demand on lower prices. An elevated price environment has also meant lower cotton use and where possible a shift towards chemical fibres.

Source : commodityonline.com