Market Matters Blog

Cotton's Acreage Conundrum

DTN China Correspondent Lin Tan sent us an article about China's declining cotton acreage earlier this week. Farmers there have planted 20% fewer acres to cotton than they did the year previous, marking two years of decline.

Cotton acreage in the U.S. is also taking a hit this year. According to USDA's Prospective Planting survey, farmers were only likely to plant 9.55 million acres, down 13% year over year. With the heavy rains in Texas this spring and early summer, there have been plenty of reports about cotton acreage declining even more.

It's just one of the many things to watch for in USDA's June 30 Acreage report. But the real question is: when will the world work through its glut of cotton stocks? With global stocks-to-use around 92%, it seems there's a lot of work that needs to be done to turn the cotton prices around.

In the meantime, here's Lin Tan's story for a better perspective on why cotton is falling out of favor with Chinese farmers.


China Cotton Acres Seen Down 20%

By Lin Tan

DTN China Correspondent

BEIJING (DTN) -- Cotton acreage is expected to decline 20% in China this year, down to 8.4 million acres from last year's 10.4 ma, according to a recent field survey by the China National Cotton Market Observing System.

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"This is the second year of sharp decrease in cotton acreage," said Zhonghua Wang, an analyst in Beijing. "Last year's acreage was 12.5% lower than 2013/2014."

DTN Analyst Todd Hultman said a 20% decline in acreage is steeper than the 10% USDA's currently predicting. "I would say there are slow bullish changes emerging in cotton, but it is difficult to tell how long it might be before prices actually climb higher.

"It also helps that USDA is estimating a 16% drop in U.S. planted acres this year, and that may even turn out to be less with this year's excess rain in the Southern Plains. The difficulty for cotton is that it will take time to work off the heavy burden of world ending stocks that USDA estimates at 106 million (480-lb.) bales or 92% of annual use."

China's acreage is due in large part to a change in China's support policy to a target price program. Lower prices didn't help either, Wang said.

"The Chinese government terminated the floor price purchase program on cotton last year," he said. "The program had supported cotton prices for several years, but the uncertainty of the market after the policy change put pressure on farmers to produce more cotton" before the program changed.

The floor price in 2013, the last year of the program, was $1.49 per pound. The new target price program for cotton attempts to subsidize farmers based on their output and comes in the form of a direct payment, which doesn't affect the market price. The government sets the target price and then calculates an average market price for each province. Farmers are paid the difference between the average in their province and the target price.

"Upon June 10, national cotton price index is 13,329 renminbi per ton (98 U.S. cents per pound), down 23.3% compared to the price of last year," said Fang Gao, Deputy Chairwoman of China Cotton Association.

The government lowered the target price for this year's crop, Gao said. Last year, the price was $1.45 per pound. It is 5 cents lower this year at $1.40.

The current estimate of cotton production is 5.86 million metric tons, less than last year's 6.39 mmt.

"This acreage change is good for China's cotton market and also good for the state reserve," Wang said. "We are expecting the carryout in 2015/2016 will be 12.66 mmt, 0.31 mmt less than the carryout of 2014/2015."

While stocks are expected to decline, Gao said the carryout will still be too high. Overall consumption in expected to be 7.35 mmt.

Imports have fallen off sharply as China's textile industry tries to work through the stockpile. So far in the 2014/15 marketing year, China's only imported 1.17 mmt of cotton, down 44.5% from the same time period last year.

"China is expected to import only 1.58 mmt of cotton in the crop year of 2014/15," Wang said.

The U.S. is still the largest exporter to China, with a 30% market share. It's followed by India with 21%, Brazil with 15%, Australia and Uzbekistan with 12% each, and a handful of other countries sharing the remaining 10%.

(AG\SK)

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