Movement in global prices was mixed over the past month. Prices for the most actively traded December futures contract surged higher in late June, climbing from levels near 65 cents/lb to over 67 cents/lb. In July this advance was erased, with recent values dropping back below 65 cents/lb. The A Index has also decreased slightly in July, falling from 74 to 72 cents/lb.
After holding tightly to values near 98 cents/lb for the past several months, the CC Index dropped to 97 cents/lb in July. In local terms, the CC Index decreased from 13,300 to 13,200 RMB/ton.
The latest USDA report included a series of important revisions to figures for both the 2014/15 and 2015/16 crop years. In terms of production, updates to global figures were relatively small, with the 2014/15 figure increasing 120,000 bales and the 2015/16 figure increasing 140,000 bales. Larger, downward, revisions were made for mill-use, with the global figure for 2014/15 dropping 610,000 bales and the figure for 2015/16 dropping 875,000 bales.
Higher production and lower consumption led to increased projections for ending stocks, with the estimate for 2014/15 rising 1.0 million bales and the estimate for 2015/16 rising 2.0 million bales. Most of the revisions to global mill-use figures stemmed from changes made for China. Chinese mill-use estimates fell 1.0 million bales for 2014/15 and 1.5 million bales for 2015/16.
An official announcement from China detailing the reserve sales program was released in early July. One million tons (4.6 million bales) of Chinese and foreign-grown cotton held by reserves will be put up for sale. The Chinese grown cotton being offered comes from the 2011/12 (330,000 tons or 1.5 million bales) and 2012/13 (470,000 tons or 2.2 million bales) crop years. In addition, 200,000 tons (920,000 bales) of imported cotton held by the reserve system will be made available.
Indications are that some rotation of reserve stocks may occur, with 40% of the volume sold at auction eligible to be taken up by reserves at market prices. Expectations are that any additional cotton taken into the reserve system will come from the 2015/16 harvest.
This eventual volume could be limited, considering that the prices being offered for older, reserve-held, cotton are near current market values and that mills have expressed little interest in buying from reserves in previous auctions due to quality and logistical issues.
Altogether, the parameters for the current round of reserve sales do not suggest a major shift in prices, reinforcing statements made by Chinese officials that price stability is a priority. However, maintenance of auction prices near current levels should make it difficult for reserve stocks to be significantly reduced any time in the near future.
In addition, and perhaps more importantly for the global market, the maintenance of Chinese prices at a large premium relative to international values will probably inhibit a rebound in Chinese mill-use.
