Cottoning On…

Cottoning On…

As China restarts their cotton auctions, what does this mean for investors?

China, the world’s largest consumer of cotton, has also been amassing a stockpile of the stuff for years. During times of low prices, China’s National Development and Reform commission has been hoarding cotton, putting it aside for the day that demand suddenly balloons whilst being able to keep the price paid by Chinese consumers at an artificial low.

Well that day of super sky-high prices hasn’t come. We’re not even close. And added to that, with the Chinese economy slowing down, the government is looking to offload some of their excess to both boost production and to make a quick buck.

But what effect is that going to have on the wider cotton markets? And how safe are US producers in the face of these epic auctions?

Let The Auctions Begin…

At the moment China has enough cotton to make five t-shirts for every person on the planet. That sounds like a lot, but in reality there is enough in global stockpiles to make 127billion t-shirts, so it is fair to say that their offloading might not be the big news its set up to be.

Saying that, during the period of May to August this year, China is aiming to get its cotton stocks down to a five-year low. That, when added to a sharp decline in Chinese imports and falling domestic production, means that the biggest holder of cotton will aim to drop their stocks by 6% to 13.9tonnes.

They haven’t announced what quality the cotton they are looking to offload is, and that will be key for any potential purchasers. Equally, China also remains tightlipped about the quality of cotton that will remain, pushing uncertainty into the markets regarding any future auction.

But What Does This Mean For The Farmers?

Admittedly, if you were a cotton farmer, one who has been struggling to get a good price for your yield over the past years, you might look to the Chinese auctions and begin to panic. But, there are two main reasons why you shouldn’t worry, well at least not just yet…

Firstly, this is the second series of auctions held by China. The first was between July and August of last year, when the country attempted to offload one million tons of cotton. Eventually they only managed to sell 63,413 tons because buyers considered that the asking price was too high and the quality was not good enough to sway them from other ‘fresher’ stocks.

Secondly, the sales that were made previously, the 63,413 tons of cotton, were almost entirely sold within China, leaving a huge amount of global export opportunities available to US growers. Ultimately, the knock on effect on US producers was miniscule.

This year, however, there is nothing to suggest that the cotton prices will be more competitive. Added to that, if the quality is still the same as it was last year buyers may still not want to part with their cash in order to purchase it. And finally, more US growers have turned land over to soybean and other oilseeds this year, so there will be a lower quantity of cotton produced by the States, which, in turn, may help boost the price.

But What Does The Future Hold?

Everyone’s main concern with the auction, is in regard to the quality of the cotton on offer. If China is only bringing excellent quality cotton to auction, that might cause an issue. But equally, that’s not likely to happen as they are more likely to hold onto the best cotton until the price fully recovers.

At the moment, many in the know are expecting that cotton will likely trade around its current levels until there is further news around the auctions. But the experts at Rabobank have gone as far to say that the long term forecast for cotton is up, and the commodity is one of the more bullish at the current time.

So going forward, the Chinese auction is likely to have little effect on the wider markets… but it might just be enough to give their economy the gentle boost it needs, which would be a much bigger deal globally.

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