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Brighter prospects for cotton prices in 2013

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According to the latest Rabobank Agri Commodity Markets Research report on global cotton trends, cotton prices are forecast to rise up to Q4 2013 due to a 12% fall in production in 2013/14 and continued imports by China.
 
Cotton prices are forecast to rise 17% between Q4 2012 and Q4 2013 triggered by the reduced global exportable supply.
 
Though front month prices in NY fell 18% in 2012 and are down 63% from the peak in March 2011 as global stocks jumped 55% in two seasons, the trend is expected to change in 2013/14 as a supply deficit and a 29% drop in exporter inventories will result in modestly higher prices in 2013.
 
Global cotton production will be impacted in 2013/14 by strong competition for land from other row crops and a low production profitability outlook. Cotton planted area is forecast to fall 10% YOY in 2013/14 as growers switch to higher margin crops such as corn and soybeans. Drought conditions in the US and India may also limit cotton plantings as growers are reticent to invest in irrigated water or plant into dry soil.
 
Cotton area will likely be displaced, further reducing production expectations and resulting in a forecast deficit of 7.6 million bales in 2013/14.
 
The fall in output comes as modest demand growth, a function of lower cotton prices and high crude oil values, is expected to lift consumption back to the 5‐year average. Cotton use is likely to remain hampered by weak macroeconomic conditions and modest apparel sales in 2013/14 and is forecast to be 10% below the record demand in 2006/07. 

Reserve stock selling in China is not expected to have a major bearish impact on NY prices in 2013 as Chinese imports are forecast to be sufficient to tighten exportable supplies. Low availability and high prices in the Chinese cotton market contrast with the current international situation, with the two markets linked through Chinese imports. The Chinese government sold 799,000 bales of reserve cotton from January 14-18 for CNY 19,179/tonne (USc 140/lb), approximately USc 60/lb over the prevailing international price. The government also offered 436,000 bales of imported cotton with the reserve supply auctioned. Given the sizable import arbitrage, imports are expected to remain strong despite large stockpiles of cotton.

China’s cotton imports and the falling production expected in 2013/14 will result in a significant reduction in the exportable supply of cotton.

Speculators in the cotton market in NY have shifted out of the bearish positions held in 2012 and further buying can be expected if the outlook for the 2013/14 crops is lowered. Planted area, soil conditions and export figures in the US are expected to be triggers for further expansion of the spectacular net long position. 

Cotton production costs have increased over the past five seasons, raising the price level that growers require to achieve profitability. According to USDA data, cotton production costs have increased by 12.4% from 2007 to 2011, and are forecast to increase by another 4% from 2012 to 2014.

US cotton area is forecast to fall to 9.985 million in 2013 as profitability and drought reduce incentives to plant cotton. This is based on the profitability of cotton relative to the other row crops as well as the expectation by the National Weather Service that the current drought will persist for much of the US into the spring planting season.

Backwardation in the NY forward curve is expected to move toward contango as it becomes clearer that new season cotton supplies will be diminished by lower planted area. Old crop cotton prices have been supported by strong US export commitments, which have reached 9.1 million bales. Growing exchange inventories and a 9% increase in the domestic crop suggests no near term shortage.

The complete report is available on the Rabobank website.

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