World is about to be flooded with cotton

Global demand may not be enough to absorb additional production due to a downgrade of China's debt

The world is about to be inundated with cotton as farmers take advantage of high prices to produce more and China floods the market with excess supply from its strategic inventory.

Global output will climb 6.9 per cent in the season that starts August 1, helping push stockpiles outside of China to a record, the US Department of Agriculture estimates. American farmers, the biggest exporters, are forecast to have their biggest harvest in a decade, and crop increases are expected in Australia and top grower India.

Growers planted more acres after cotton futures jumped 12 per cent last year, when most other crops were mired in slumps. At the same time, there are no signs that China’s sales of its state inventories are slowing. The ample supply outlook means prices are now heading for the biggest monthly loss since August. Hedge funds are backpedaling on bets on a rally, lowering their wagers for the second time in three weeks.

“The supply side should remain ample, and if we see production ramp up, cotton will see further losses,” said Lara Magnusen, a La Jolla, California-based portfolio manager for Altegris Advisors, which oversees $2.43 billion. On the demand side, a recent downgrade to China’s debt has raised concern that global demand “won’t be enough” to absorb additional production.

Money managers lowered their cotton net-long position, or the difference between bets on a price increase and wagers on a decline, by 8.7 per cent to 95,904 futures and options contracts in the week ended May 23, according to US Commodity Futures Trading Commission data released three days later. 

While the USDA projects that the market will post a third straight, albeit smaller, deficit in the 2017-2018 season, researcher Cotlook is forecasting a surplus. The Birkenhead, England-based company estimates production will top demand by 44,000 metric tons.

Favorable weather has aided US spring seeding, especially in Texas, the top grower. Through May 21, American farmers had sown 52 per cent of intended plantings, up from 45 per cent a year earlier.

Output is also looking favorable in India, the biggest global producer. In Australia and Brazil, increased mechanization is aiding production and allowing farmers to compete with the US on quality.

China continues to unload inventories to supply the domestic market, dimming the demand outlook in the No. 1 consumer. At an auction on Friday, the nation sold 13,700 tons out of 29,500 tons offered, according to the website of state-owned China National Cotton Information Center.