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China's cotton stockpiling distorts prices -Louis Dreyfus
January 9, 2013 / 4:10 AM / 5 years ago

China's cotton stockpiling distorts prices -Louis Dreyfus

* Hoarding distorting prices, says Louis Dreyfus chief

* Prices should be around 50 cents based on real fundamentals

* Switch to synthetics a major headwind

By Josephine Mason

SAN ANTONIO, Texas Jan 8 (Reuters) - The cotton chief of global trader Louis Dreyfus Commodities took aim at the largest buyer of raw cotton on Tuesday, blaming China’s aggressive stockpiling program for hampering the fragile industry’s recovery and distorting global prices.

Joe Nicosia, head of the world’s biggest cotton merchant, told hundreds of U.S. growers at the Cotton Beltwide conference that enduser demand would not rebound unless prices fell to make it competitive with polyester. That will only happen when Beijing stops soaking up the world’s surplus fiber.

“The longer China holds on to its policy, the worse and more dire the situation will become,” said Nicosia, executive vice president and global head of cotton at the commodity trader.

His comments reflected widespread concern among U.S. merchants, farmers and mills about the impact of Beijing’s hoarding, which effectively keeps half the world’s inventory off the market, as the industry struggles to repair damage from the wild prices of the past four years.

After a two-year buying spree as part of a government-backed program to support its farmers by paying premium prices for home grown fiber, Beijing’s strategic reserve will have accumulated an estimated 40 million bales of cotton by the end of March.

Paying bumper prices, almost double the U.S. futures prices, has encouraged China’s farmers to grow more, but has also eroded demand as its mills have switched to cheaper synthetic fibers. The stockpile has also starved China’s mills of a ready supply of domestic raw material.

While Beijing is preparing to deal with the problem by selling some stock and issuing fresh import licences for its mills, it is unlikely to remove the overhang any time soon.

Nicosia said it could take until 2014 or 2015 before the surplus was eroded and market returned to balance.

“There’s no danger China will dump it on the marketplace, but it will hold it for a while and it will be a wet blanket over the market for quite a while,” Nicosia said.

It is unclear how the government will offload the stockpile. Some say the authorities may use it to supply China’s mills if it makes a push to cut cotton output and boost agricultural output as part of efforts to feed its growing urban population.

But current futures prices suggest it would be a loss-making venture for the world’s second-largest economy. Beijing would lose some $10 billion if it sold stocks based on the most-active March futures contract, Nicosia said. March settled at 75.12 cents per lb on Tuesday, up from 75.71 a day earlier.

While farmers agreed the policy has probably distorted the recent market outlook, other factors have contributed.

The steady decline in market share to synthetics started in 2008 after a price spike and before Beijing entered the fray.

A subsequent surge, over the course of a year, took prices to record highs of $2.20 per lb in March 2011 and sped the loss of market share.

To be sure, China’s voracious appetite for cotton was one of the reasons for the rise, but investors were also worried about supply tightness after a devastating drought wiped out crops in Texas, the United States’ biggest growing state.

Even as mill use plunged in the second half of 2011, farmers grew more more cotton to take advantage of the soaring prices.


With the market now facing a record surplus of just under 80 million bales in the 2012/13 season and consumption down a fifth from its 2005/06 peak at 123 million bales due to those events, Nicosia believes prices should be in the 50 cents range.

But futures prices are propped up at levels he considered unjustified because half the world’s inventory was held in Beijing and the state reserve typically stepped in to snap up fiber for its stockpile as soon as prices gravitate towards 70 cents, he said.

That price is considered cheap by the state because it is almost half it pays its farmers for their crops. As their interest sends prices towards 80 cents, they then back off.

“As long as China is soaking up supply, we’ll be prone to oversupply and unable to find a balance,” he said.

While 70 cents is well off the record, it is well above historic averages. Futures have not traded below much below 70 cents for more than a few days since November 2009.


The other headwind for the market is the meteoric rise in the use of polyester, which is cheaper than cotton and less volatile in price.

“It doesn’t need rain. It doesn’t need sunshine. It doesn’t need to worry about weeds,” Nicosia said, highlighting the reasons for the manmade fiber’s popularity over cotton.

China’s capacity to produce manmade fiber has surged to 12 million tonnes from 1.1 million in 1995. That is equivalent to 60 million bales of cotton, about half of global consumption this year.

“The world needs Chinese demand. We have to get it back,” he said.

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