In recent months, cotton prices have maintained a stronger appearance despite concerns about world demand, Chinese imports below historical levels, weakness in other commodity markets and a stronger dollar. Although several bearish indicators are still in place, a lack of exportable supplies in Central Asia and West Africa coupled with Indiaâ€™s reduced exports is helping to support current prices.
In addition, unfixed on-call sales are providing support to futures prices. However, the struggling global economy and man-made fiber competition underscore the challenging landscape facing cotton demand.
At the NCCâ€™s 79th Annual Meeting in Dallas, Texas, Jody Campiche, the NCCâ€™s vice president, Economics & Policy Analysis said that world mill use is expected to exceed world production in 2017, and global cotton stocks are projected to decline by 7.7 million bales in the 2017 balance sheet.
World production is projected to be 105.6 million bales in 2017. World mill use is projected to increase by 1.5 percent in 2017 to 113.4 million bales with most of the growth from China, Vietnam and Bangladesh.
While projections of global consumption exceeding production normally would be supportive of prices, the implications for the this year may not be as clear cut as stocks outside of China are projected to increase by 3.0 million bales for the 2017 marketing year.
The majority of the global stocks decline is due to Chinaâ€™s reduced inventories. While Chinaâ€™s increased consumption of reserve stocks has bolstered mill use in 2016, it also has curbed Chinaâ€™s demand for imported cotton fiber and cotton yarn.
Regarding domestic cotton mill use, USDA estimates 2016 U.S. mill use at 3.3 million bales, down 150,000 bales from 2015. The Economic Adjustment Assistance Program continues to be an important source of stability allowing mills to invest in new facilities and equipment, but the strength of the U.S. dollar is creating challenges for yarn exports. For 2017, the NCC is projecting a modest increase in U.S. mill use to 3.4 million bales.
In recent years, U.S. export customers have changed with a significant reduction in exports to China. However, reduced exports to China have been partially offset by increased U.S. exports to Vietnam.
Looking ahead to 2017, increased competition from other cotton-producing countries is expected to reduce both U.S. exports and U.S. market share. With exports pegged at 12.4 million bales, Campiche projects total U.S. offtake of 15.8 million bales in 2017, leading to an increase in ending stocks of 898,000 bales.
In China, cotton mill use is again exhibiting signs of growth, but competition from lower-priced man-made fiber remains a limiting factor for the growth of cotton fiber use. Campiche said that Chinaâ€™s internal cotton price is still almost twice the level of polyester prices. While Chinaâ€™s reserve auction sales have led to increased consumption by mills, this also has limited Chinaâ€™s imports of raw cotton fiber and cotton yarn.
In the current projections, Chinaâ€™s cotton imports are not projected to increase until the reserve stocks are reduced to what they consider a â€œmore reasonable level.â€
In the 2017 marketing year, an additional 10.8 million bale reduction in stocks is expected. A successful auction series over the next two years easily could place China in a position to again become a larger cotton importer.
Campiche said that the NCC projects 2017 U.S. cotton acreage to be 11.0 million acres, about 9.4 percent more than 2016. With abandonment assumed at 12 percent for the United States, Cotton Belt harvested area totals 9.7 million acres. Using an average U.S. yield per harvested acre of 830 pounds generates a cotton crop of 16.8 million bales, with 16.0 million upland bales and 760,000 extra-long staple bales.
However, it is important to note that although the survey results suggest an increase in acreage, the increase in cotton acreage is largely the result of weaker prices of competing crops and improved expectations for water.
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