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Market Monitor | June 2015

China to start clearing cotton stockpiles?

China will start selling its massive cotton stockpiles this year, in a move likely to depress demand as the country's mills hold off buying in anticipation of sales of discounted fibre. Market rumours have been hinting that China was preparing to release some of its holdings, which have swelled to around 10 million tons more than 40 per cent of world stocks. China, the world's top consumer of the fibre, would issue detailed sale plans in soon, Yin Jian, an official at the National Development and Reform Commission, told an industry conference.

Expectations of a stockpile selldown have exacerbated sluggish demand for cotton in China as mills have kept inventory to a minimum ahead of anticipated State auctions. Global cotton prices have been tracking around five-year lows for the past 10 months, under pressure from weak demand and large stocks. Yin said that it would take several years for the market to digest China's State-held cotton reserves. While the nation is under pressure to release stocks to recover part of its stockpiling costs, big discounts could risk pushing down market prices, and lead to increased costs for the government under its subsidy scheme to farmers.

China currently sets a target price for cotton and pays farmers the difference between the target price and the average market price. The subsidy scheme replaced the previous stockpiling scheme, but is likely to face changes. China is under pressure to find new ways of supporting farmers, with farmer groups in the United States and other markets recently complaining that China has gone beyond what is allowed under World Trade Organization rules.

Meanwhile, India's cotton production is expected to decline for the second consecutive year to 37.5 million bales in 2015-16 marketing season, due to a likely fall in yields on account of delayed sowing, weather and low price realisation, according to USDA's latest report. For the 2014-15 marketing season (August-July), the US Department of Agriculture (USDA) has forecast cotton output to be 38 million bales while the government has projected 35.3 million bales.

USDA says in its latest report that India's cotton production is forecast at 37.5 million on 12 million harvested hectares. In Gujarat and Maharashtra, sowing has commenced, but is limited to fields with assured irrigation. Farmers' planting decision to expand cotton acreage, according to the report, has become difficult as prices of competing crops in various states have dropped.

Cotton, a predominantly monsoon-season or kharif crop, is planted from the end of April through September and harvested in the fall and winter. The Met Department has already forecast that the Southwest Monsoon is expected to be 12 per cent deficient this year. India accounts for about a third of the global cotton area. The country's two-thirds of cotton are produced in states such as Maharashtra, Madhya Pradesh, Gujarat and Odisha where much of the crop is rain-fed. The northern zone, which consists of Punjab, Haryana and Rajasthan, produces cotton under irrigated conditions and accounts for about 15 per cent of production. In South, Andhra Pradesh, Karnataka and Tamil Nadu chip in with 30 per cent

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