With a record carryover from a record 2011 world cotton crop, the slide in prices could’ve been even steeper, says Hank Reichle, were it not for the 20 million bales of reserves being held off the market by the Chinese government.
“All that cotton is just sitting in their warehouses, and it’s only going to be available when they say it’s available,” he said at the joint annual meeting of the Southern Cotton Ginners Association and the Delta Council Ginning and Cotton Quality Committee. Reichle is vice president of export sales and market administration for Staple Cotton Cooperative Association at Greenwood, Miss.
“To the Chinese government, that 20 million bales is minuscule in the overall scheme of things,” he says. “If we subtract those bales out of the market, it gives us a stocks–to-use ratio is below 50 percent. That’s why cotton prices today are at 70-odd cents rather than 50 cents, like they would’ve been if all that cotton was sitting in the market looking for a home. And we’d probably be getting out of cotton pretty quickly if we were looking at 50-cent cotton versus $13-plus soybeans.
“It’s a positive factor for the cotton market,” Reichle says, “that the Chinese government has absorbed some of the world’s cotton excess in their reserve. When they start to release that cotton, they’re far more likely to be price limiters than price suppressors. They’re not under pressure to dump their cotton — they can sit there and hold it as long as they want to.
“They paid $1.20 for that cotton, and what’s most likely to happen is, as prices rise, they’ll ease it out into the marketplace. They’re inclined to hold cotton, because they didn’t have enough in reserve when prices spiked in 2010.
“They want to control prices, and those reserves will act as a limiter on prices and help keep them at a level where you can grow cotton profitably. I don’t see it in the cards for them to one day just dump all this cotton on the market.”
While the world is sitting on a lot of unused cotton from 2011— some 67 million bales estimated by the USDA for the marketing year ending July 31 — the situation isn’t as gloomy as the numbers might appear, Reichle says.
“Looking at the stocks-to-use ratio, that carryover means that 63 percent of the cotton that’s going to be used in a year is represented in these stocks.”
A number above 50 percent is bearish, he says, while the upper 40 percent range tends to be neutral, and a number in the low 40 percent range “is when we start to see a situation where stocks are really tight.
“Right now, on the surface, the world cotton balance sheet is as bearish as it has ever been, especially in terms of total bales and the stocks-to-use ratio.
“But, the U.S. is tight with a 22 percent stocks-to-use ratio. India’s ratio is also tight.. China is the biggie with 27.33 million bales ending stocks. They’ve brought in cotton from their own producers and from the world market for their state-owned reserves, which they’ll hold until they’re ready to release it.
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