Last season (2015/2016) total world cotton stock declined by 3 million tons. In the beginning of the current season (2016/2017), which started August 1, 2016, the opening stock of world cotton was around 19 million tons, about 80 percent of the world’s total annual mill use. Most of the world’s cotton stock (about 11 million tons) is held by the Chinese government.
Worldwide production this season was 22.4 million tons, 1 million tons more than last season, according to estimates by the ICAC. The highest levels reached in recent history were in 2011/12, when production reached 27-28 million tons.
“In short, we will have a moderate increase in production, but will still have a very large stock,” said Andrei Guitchounts, Director of Trade Analysis, at ICAC.
“At the same time, we expect world consumption (mill use) will remain unchanged at about 23.8 million tons,” Mr. Guitchounts told Inside Fashion.
“The supply of better quality cotton is also very good. It isn’t affected by weather or any other factor. Uzbekistan will have good production this season and there is also sufficient supply of good quality cotton from Australia and even Africa, so I don’t see there is any shortage of good quality cotton,” he said.
Who’ll Be the Big Buyers
China is trying to limit imports while it digests the cotton from its stockpile. The nation will try to use this cotton before importing from other countries.
“Next season we expect that China will only import about 1 million tons of cotton, so cotton exporting nations will experience a contraction in sales next year, not only the U.S.,” said Mr. Guitchounts.
As China continues to import less cotton, sellers are looking into new markets. Bangladesh, Vietnam is emerging as the most important market for cotton exporters.
“Bangladesh is the fastest growing market, followed by Vietnam. We expect those countries will increase their imports and mills usage by 13-15 percent compensating for some of the decrease in demand from China,” he said.
A major challenge for cotton is competition from polyester. Lower oil prices are helping to keep polyester prices down, as is China’s huge polyester producing capacity. In the price-driven apparel market, this gives polyester a key advantage over cotton.
“In 1995, cotton accounted for more than 50 percent of total world fiber consumption, now we estimate it is only about 27 percent,” said Mr. Guitchounts.
This season the U.S. cotton growing area will increase by about 650 hectares, about a 20 percent larger area than last year, according to ICAC’s estimates.
The expanded planting is mainly due to the stable cotton prices and less competition from other crops.
Industry experts estimates the average price for the 2016/2017 season will be about 75 cents/pound, but that there is going to be more volatility in the market.
"We expect to see the price go a little higher this season and we estimate the average price will be about 75 cents/pound for the whole season, up from an average price of 70 cents/ pound last year," said Mr. Guitchounts. “It is a little higher than the last season, but if you look back over the past 20 years the price is neither too higher or too low, ” he explained.
“In general, we have a healthy, balanced supply and demand situation,” he confirmed.
Australia had good rain in 2016. In last crop year (2015/2016), Australia harvested 2.7 billion bales of cotton. Most of the cotton has been sold on future contract.
“Australian cotton is selling well,” said Adam Kay, CEO, Australia Cotton. “China is importing less cotton from Australia – only about 30 percent of our total cotton exports compared with 60 percent is previous years – as they try and work through their stockpile.
“Good quality, responsibly produced cotton is in high demand, and while Chinese imports are down, there’s rising demand India, Vietnam and Bangladesh.
This year’s strong prices have encouraged Australian cotton farmers to grow more cotton next season. Australia Cotton estimates cotton production next year could reach to 4 million bales.
“The biggest challenge for Australian cotton growers is water. How much rain we had limits how much cotton a farmer can grow. This year, we had good rain, so water shouldn't be a problem,” Mr. Kay told Inside Fashion.
“The next crop will come next May. By the middle of December, we should have a very good idea of how big is the cotton growing area this year, and have a better idea of how much production we will have next year,” Mr. Kay told Inside Fashion.
“Apart from water, what keeps Australian cotton farmers awake at night is unfair market competition,” said Mr. Kay, referring to nations that subsidize their cotton crops.
Australia has the most efficient cotton growing system and so it able to achieve the highest yields per hectare worldwide - three times higher than the world average. Still, lack of government support puts growers at a disadvantage.
In 2016, Chinese cotton prices went from 11,000 yuan per ton (US$1590 dollar per ton) in the beginning of the year to 16,000 yuan per ton (US$2312 dollar per ton) by late November, exceeding market expectations. "The high price is not due to long-term increases in demand, but rather to a short term mismatch of demand and supply,” said Pei Ting, senior marketing manager at Cotton China Organization.
During the past few years, the demand from domestic mills has been stable, at around 7.5 million tons. During the most recent crop year (2015/2016), China harvested 4.7 million tons of cotton, and along with stockpile cotton, there is more than enough supply to satisfy the market’s needs.
The weak market at the beginning of 2016 had many domestic suppliers betting cotton prices would continue to drop after the Chinese government started to sell its stockpile in April, and therefore they didn't stock enough cotton. However, the el Niño phenomenon in the middle of the year reduced the cotton growing area. At the same time, the Chinese government started to auction off the stockpile by selling good quality, imported cotton first. This helped to stabilize cotton prices and boost market demand. As mills saw that cotton prices weren’t going to decline, they started to buy more cotton, pushing up prices.
China: 2017 Outlook
Industry experts expect that in 2017 Chinese domestic cotton prices will retreat to a more reasonable level. The biggest uncertainty is whether Beijing will change the policy guidance on selling its stockpile next year. However, it is more likely that the Chinese government will maintain its current policy.
The government has announced that it will start the next round of stockpile auctions in March 2017. According to Cotton China Org, from this October to next February, the total market demand is estimated to be 3.4 million tons. On the supply side, it is estimated there will be 5.3 million tons of new cotton harvest. In addition, there are currently 0.3 million tons of cotton in the hands of the mills and 0.45 million tons of import quota (first half of 2017). Overall, there is are more than enough supply to keep the price at a relatively low position.
In the current crop year (2016/2017), China will decrease its cotton growing area by 2-3 percent. Since direct cotton subsidies mainly go to farmers in Xinjiang and other Northwest provinces, cotton growers in other parts of the country are likely to reduce their planting this season.