Australian cotton growers double their plantings this season with cheap water, strong overseas demand and attractive cotton prices. Prices have steadily climbed throughout the year, the second consecutive season where global consumption would exceed production.
Prices have also been supported by reports of global cotton stocks decreasing, as China â€” which holds an estimated half of the worldâ€™s cotton stocks in reserve â€” works through its stockpiles.
In the year to date, Chinese cotton imports were down 42 percent compared with the previous year, leaving Pakistan, Bangladesh, Indonesia and Vietnam to pick up the excess demand.
Chinese officials recently announced a cutback in imports, in an effort to further reduce stockpiles, but Commonwealth Bank of Australia (CBA) agri-commodity analyst Madeleine Donlan is tipping that might not last long.
Between March and August next year, China will be looking to start reserve auctions again, but they've probably already sold the highest quality cotton first. Because these stocks are ageing, the quality is going to become an issue and it will require blending.
So if higher quality stock isn't available domestically, it will have to come from overseas.
Prices have not moved sharply upward in some time, leading CBA analysts to warn that investors in the market may look to sell up their near-record long position (holding contracts in anticipation of a price rise) in cotton.
Given the size of investors' position in the market, if they do rush to the exits, that'll push down prices, but that could be just a short-term issue.
If sharp falls are repeated enough, it can become an explosive problem.
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