India shook the global cotton trade in early March by suddenly shutting off additional registrations of cotton for exports and indicating that some cotton already registered may not be shipped. The latest supply, demand, exports and stocks estimates by the Foreign Agricultural Service (FAS) of USDA provides a clearer picture of conditions, but shows again the importance of timely release of data on inventories and use.
The largest changes in world numbers came from within India as FAS analyzed additional information released by the Indian government. Based on domestic use and exports for August through November, FAS has estimated that cotton stocks on hand on August 1, 2011 were 10.85 million bales, 3.25 million bales higher than thought earlier at 7.60 million bales, a 42.8 percent increase. FAS had been carrying a negative residual number for the 2010/11 marketing year indicating they believed there was an imbalance somewhere in the supply, demand and stocks estimates. FAS relies mainly on official Indian data and balance sheet estimates provided by the India Cotton Advisory Board.
Based on the amount of cotton already registered for export, FAS increased Indian exports for the 2011/12 marketing year by 1.15 million bales to 8.9 million bales, a 14.8 percent increase. India’s production was lowered by 500,000 bales to 26.5 million bales, almost unchanged from a year earlier. Domestic use estimates were unchanged from March at 19.5 million bales, down 1.6 million bales from a year earlier. End of the marketing year stocks on July 31 were increased by 1.6 million bales from 7.9 million bales last month to 9.5 million bales this month, down from 10.8 million bales last year, but higher than the previous three years.
Buying by the Chinese government to fill state reserve stocks helped to spur the Indian export ban. FAS now estimates Chinese cotton imports for 2011/12 at 20.5 million bales, up 2.0 million bales from last month, and far above recent years of 11.0-12.0 million bales. China’s production was left unchanged at 33.5 million bales, up 3.0 million bales from last year, while domestic consumption was lowered 1.0 million bales to 42.5 million bales, down from 46.0 million bales last year and the lowest in the past five years. The cumulative effect of these changes was to increase the carryover stocks for this year by 3.0 bales to 23.1 million, almost double last year’s carryover of 11.6 million bales, but near the 20.5 million bales held at the end of 2007/08 and 22.4 million bales at the end of 2008/09.
The Chinese government announced in the spring of 2011 it would buy cotton for the national reserve during harvest to support farm prices. They had been record high in 2011 because of tight stocks at the end of the 2009/10 and only modest stocks building was expected in 2010/11. The government gave no indication of how much it would buy, but the FAS reports that domestic purchases for the reserve have been about 14.0 million bales, 41.8 percent of domestic production in 2011 and 60.6 percent of Chinese carryover at the end of the marketing year.
Total global stocks on July 31 are now estimated by FAS at a record large 66.1 million bales, up 3.8 million bales from last month estimates, and up from 50.5 million bales last year and 47.1 million bales in 2009/10. That would also be up from 60.8 million bales in 2008/09 and 61.0 million bales in 2007/08. China will hold 34.9 percent of the world stocks on July 31, up from 23.0 percent a year earlier. World stocks excluding China will be 43.0 million bales, up from 38.9 million bales a year earlier.
The U.S. Agricultural Attaché in India in a recent report said it is not clear if the ban will be removed before the 2011/12 marketing year ends. Probably about 1.0 million bales of the 3.0 million bales currently registered will be exported. Acreage is expected to be down 10 percent as cotton prices are lower after last year’s record high prices. With domestic use increasing, exports could be only 4.7 million bales in 2012/13. The Indian government has repeatedly intervened in the market for past three years and that is not likely to change as textile producers continue to seek government assistance. The Cotton Corporation of India, a government owned entity, has been directed to establish a 2.0 million bale government reserve.
Much of the price and supply confusion in the world cotton market could have been avoided with better cotton supply data from India and a more open information flow about China’s cotton reserve policy. If FAS revised estimates of beginning stocks in India are accurate, India was not as close to running out of cotton supplies and there was no need to limit exports in early March. As the number two producer and exporter of cotton accounting for over 20 percent of world trade, India cannot avoid its need to collect accurate, timely stocks data.
The same is true of China. As the number one producer, consumer and importer accounting for 49.9 percent of imports, it cannot start a national reserve policy without being clearer about its intentions so other market participants can make informed decisions. FAS noted that cotton prices have remained relatively stable in recent months as Chinese buying offset lower global spinning demand. A reasonable assumption would be that world prices will weaken as China ends its stock building program, unless final demand picks-up elsewhere. China’s stocks build-up has created an artificial market that is disappearing.
The G20 countries, including China and India, which account for almost 80 percent of world cereal production, meeting in France last November committed to increase transparency in agricultural markets. They agreed to increase the quantity and quality of information available, especially stock levels and harvest forecasts, covering wheat, corn, rice and soybeans as part of an Agriculture Market Information System database. Cotton could easily be added to that list.
U.S. commodity market analysts often voice concerns when they believe that USDA grain, oilseeds and cotton inventory estimates are inconsistent with other market indicators. While some of that may be convenient cover for faulty analysis, the situations in India and China show the importance of inventory data from around the world in facilitating price discovery and aiding in government trade policy decision making.
Ross Korves is an economic policy analyst with Truth About Trade & Technology