More Ink for China's Cotton Market

China’s need for cotton is getting a tremendous amount of ink recently. Once it makes the front page of the WSJ or FT, you know it’s not a secret anymore. However, one of the biggest discrepancies in the information offered is the amount of imports China is expected to swallow in the 2009/2010 season. The USDA and the ICAC have projected total imports for China to be just over 2 mmt, whereas the National Cotton Market and Monitoring System (NCMMS), a subsidiary of the China National Cotton Information Center (CNCIC) as well as the China National Cotton Reserves Corporation (CNCRC), has estimated imports to be around 2.83 mmt.

This discrepancy deserves special mention due to the status of the NCMMS. The NCMMS is an information monitoring, publishing and early warning system approved by the government. This means the NCMMS is a recognized on-the-ground body assigned the task of determining intended cotton acreage, planted cotton acreage, harvested cotton acreage and total cotton output. While other government bodies offer their respective estimates and the market trades the sum, the smart money is following the NCMMS. They have 10 regional offices located in the cotton producing and consuming provinces. In addition, they have more than 200 monitoring stations in the same provinces observing the cotton crop and working directly with textile mills. Hence, they are well positioned to know exactly what’s going on in the greater cotton market in China. More importantly, the government listens to what they have to say and I would suspect makes some key decisions (perhaps the amount of import quota to be released) based on their information.  

As a result of the above, I am keen to see what type of adjustment, if any, may be forthcoming in the USDA’s May WASDE report.

India Bans Cotton Exports; China's Textile Mills in a Pinch

Breaking news from the Globecot News Network.....

In a surprise move Monday, India, the world’s second-largest exporter of cotton, announced the suspension of new registrations of cotton exports effective from April 19th 2010 until further notice. The announcement from the Office of the Textile Commissioner here impacts new registrations of raw cotton, cotton waste, and combed or carded cotton. The ministry indicated it took this action in response to the steep increase in local cotton prices, which comes on the heels of an announcement just last week of a new 3% tax on raw cotton and cotton waste exports. Ironically, while this action may ease supply constraints in India, it is likely to exacerbate the situation for foreign buyers, particularly in China and Pakistan. In turn, by effectively removing a sizable portion of exportable supplies from the world balance sheet, this is likely to boost world price as importers and exporters alike scramble to shift fiber sourcing in response to this news.

While the Office of the Textile Commissioner did not determine the exact volume of cotton likely to be affected by this suspension in new registrations, the tally originally due for shipment just in the remaining months of this marketing year is likely to be sizable. So far this marketing year, an estimated 4.4 million 480-lb bales of Indian cotton have already been shipped through the end of March. With the latest USDA forecast anticipating exports were to have reached 6.1 million bales, this implies that roughly 1.6 million bales—minus bales already registered or shipped in the first three weeks of April—now may not be shipped this marketing year. On balance, we gauge the bales likely to be subject to this suspension in the remaining three months of the marketing year at roughly one million bales.

The impact of this suspension is likely to be felt in several key importing markets across Asia. To begin with, assuming this estimate of one million bales is accurate, this will effectively remove roughly one in eight bales from global exportable supplies in the next three months. In particular, over the October – March time period, China alone imported 2.3 million bales from India, accounting for roughly 56% of season-to-date exports of Indian cotton. What’s more, India’s ten largest export markets are all net importers of cotton, meaning that with this major supplier curtailing shipments in coming months, these buyers will have to turn elsewhere to meet their import needs. At this late point in the marketing year, much of that exportable supply is likely to come from the U.S., dramatically dwindling U.S. exportable supplies and presumably driving price higher.

While we caution against drawing premature conclusions from India’s announcement, the impact of such a suspension certainly could be far-reaching and could drive global cotton prices higher. We will continue to monitor this breaking issue as new issues develop.