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Chinese reserve system boosting cotton stocks

Chinese reserve system boosting cotton stocks Source:
Date: 11-01-2012
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Purchases by the Chinese government are absorbing a large portion of the 2011/12 global cotton crop, according to data released earlier this month, with efforts to rebuild the national reserve likely to lead to a recovery in world stocks.

Inter-governmental group the International Cotton Advisory Committee (ICAC) is forecasting global cotton production to rise by 8% year-on-year in the 2011/12 season to 26.8m tons, but says consumption could decline by 2% to 23.9m tons.

As a result of the projected surplus of 2.9m tons, global cotton stocks could rebound to 11.9m tons by the end of 2011/12. This recovery follows two seasons of relatively tight global stocks.

Almost 40% of the gain in global stocks this season could take place in China, due to the rebuilding of the national reserve, the ICAC believes.

Between 8 October and 30 December 2011, a total of 2.1m tons of domestic cotton were purchased for the China national reserve. Daily purchases are continuing. There is no limit to the amount of domestic cotton to be purchased by the national reserve this season.

In addition, it is reported that about 1m tons of non-Chinese cotton has been bought for the reserve; this cotton will be shipped to China over the next few months.

Overall, the national reserve, which was almost exhausted by the end of 2010/11, could grow by at least 3m tons or 11% of 2011/12 global production. It is possible that some of the reserve cotton will be sold later in the season.

The Chinese government began stockpiling cotton in September, in a move designed to stabilise domestic cotton production and help avoid fluctuations in cotton prices. The scheme will run for seven months until the end of March. 

Outside of China, cotton stocks are expected to grow by 26% to 8.7m tons in 2011/12, the largest in four years.

The lack of demand for cotton and ample supplies are placing downward pressure on prices. The Cotlook A Index dropped from 114 cents/lb in early August 2011 to 93 cents/lb in late December 2011.

The average Cotlook A Index for the first five months of 2011/12 is 109 cents/lb or a third lower than the 2010/11 full-season average.

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