Cotton stocks above 80 mln bales for first time-USDA
NEW YORK, Nov 9 (Reuters) – The U.S. government has raised its 2012/13 forecast for global cotton inventory to above 80 million 480-pound bales for the first time due to larger-than-expected output in the United States, the world's third largest producer, and falling demand from China, the world's largest consumer.
While analysts and traders expected the increase, surpassing the 80 million mark is likely to reinforce concerns about rising supplies and long-term demand as mills use more man-made fibers. It will also heighten uncertainty about the Chinese government's stockpiling strategy.
In its monthly crop report, the U.S. Department of Agriculture increased its estimate for 2012/13 ending stocks for a fourth straight month to a new all-time high of 80.27 million bales.
The new forecast is up from 79.11 million last month, and 15 percent higher than 2011/12 levels.
It was largely driven by a 500,000-bale rise in global output, due to increases in the United States, Uzbekistan and some African countries, and the same-sized drop in consumption, mainly due to China.
Tentative fears that Superstorm Sandy, which battered the U.S. East Coast at the end of October, had damaged crops in Virginia and North Carolina appeared unfounded as the government raised its estimate for U.S. production and inventory due to higher yields.
The output forecast of 17.45 million bales, up almost 1 percent from last month, was driven by higher yields which increased to 802 pounds per acre from 795 pounds. It hiked its ending stock forecast by 3.5 percent to 5.8 million bales.
"The cotton reports were negative with the United States and bearish with the world," said Sharon Johnson, senior cotton specialist at Knight Futures.
After falling to 69.11 cents per pound immediately after the release, the most-active December futures contract recovered but remained below the psychologically key 70 cent mark.
After falling for the prior three sessions ahead of the data, December prices settled at 69.58 cents per pound, up 0.46 percent. The expiry of December options distorted trading, analysts said.
A global carryover for 2012/13 of over 80 million bales has alarmed some growers and traders, particularly with China's consumption expected to drop for a third consecutive year. Usage is forecast to fall to 35.5 million bales, down 28 percent from 2009/10.
But almost one-half of the carryover is expected to be held in China's massive strategic reserve, where it is effectively removed from the open market, analysts say.
On Friday, the USDA raised its inventory forecast for China, the world's main textile market, to 37.11 million bales, up over 1 percent from last month. That is partly due to the state-led stockpiling policy, according to analysts.
For the past two years, Beijing has been buying domestically grown fibers to support its farmers and amassed a hoard of as much as 30 million bales at the end of the last season. It has continued the policy since the season started on Aug. 1.
That strategy has effectively reduced supplies of fibers and locked out the domestic mills from the local market, forcing them to import raw cotton.
"Supplies (in China) are tightening due to the accumulation of production in the national reserve," the USDA said on Friday.
Cotton usage data for the country has been further skewed by increased imports of yarn, a semi-finished fiber.
Rather than buying foreign raw fibers that incur import duties, those that can – the integrated mills – have found it cheaper to skip processing of raw fibers and instead import more duty-free yarn from the major producing countries, Pakistan, India, Vietnam and Turkey.
Some were surprised the USDA did not adjust upwards its usage estimates for those countries to reflect the movement of demand for fibers to locations outside of China.
Some were also surprised the government did not cut its stocks forecast for India, the world's second-largest producer, to bring it in line with the USDA's own foreign data service.
In a report dated Nov. 1 and posted on the USDA's website, its Global Agricultural International Network (GAIN) estimated Indian stocks by next July would be 5.7 million bales, well below the USDA's estimate of 8.7 million.
To be sure, if the USDA does cut its Indian stock forecast by 3 million bales and increase its prediction for demand outside of China to reflect the displacement of fiber processing, it will do little to eat into the record surplus expected this year.
But the changes should help alleviate concerns in the global cotton market about falling consumption, traders said.
"I think they're a bit behind the curve. Eventually they have to start revising the numbers," said Peter Egli, the director of risk management for UK-based medium-sized merchant Plexus Cotton Ltd.