CHINA’s massive build-up in reserve cotton stocks from 2011/12 to 2013/14 is the major cause of a dramatic increase in global stocks, according to the latest report from the United States Department of Agriculture (USDA).
In three years, China added over 50 million bales to its State Reserve (SR) stocks.
The USDA says this explains the rapid rise in world stocks-to-use to 95pc in 2014/15.
China began to build such a huge reserve after the price shock in 2010 when the A-Index reached $1.75 per pound.
Internal prices in China also surged dramatically, despite the SR’s release of over 10 million bales that year.
Somewhat surprisingly, stocks outside of China remained stable during China’s multi-year stock build up despite China needing massive imports to support both the build-up in SR stocks and domestic mill use.
With SR stocks effectively off the global market, prices remained strong and supported production outside of China.
The USDA said China began reducing the level of the State Reserve in 2014/15 and continued until 2018/19.
The reduction in import demand for the SR helped lower world prices which led to lowered production in 2015/16 and helped keep stocks outside of China from rising.
Stocks at preferred level
China is believed to have recently reached its preferred reserve stock level in 2019/20 and global stocks initially looked to behave like another year with little year-to-year changes.
In China, limited SR activity was projected. World stocks-to-use ratio was in the mid-sixties, the upper bound of the long-term range, and little change was expected in 2019/20.
However, 2019/20 production remained relatively high as the Minimum Support Price (MSP) in India helped push its production to near-record levels and has resulted in the government acquiring significant levels of stocks.
Moreover, Brazil registered its third consecutive record crop, as most production has to second-crop cotton, which has a lower cost of production.
The USDA Outlook in February of 2020 projected that 2020/21 would be similar to 19/20, with modest consumption growth and a modest decline in world stocks.
Then COVID-19 spurred record downward adjustments to global cotton demand.
Global consumption down
Current USDA estimates show global consumption in 2019/20 and 2020/21 together down just under 25 million bales (with 2020/21 down 15pc) from the February Outlook projections.
The 2020/21 world production forecast is virtually unchanged, and COVID-19’s negative impact on cotton demand was too late in the season to shift planting decisions away from cotton for most major producing countries.
This has pushed the stocks-to-use ratio back up into the 90pc range.
Looking ahead, with government support programs in the two largest producing countries, China and India, shielding producers somewhat from price volatility, lower prices will have limited impact on global production.
Given that the massive drop in demand in recent months was not price based but due to the impacts of COVID-19, lower cotton prices alone will have little impact on demand.
Before global stocks can be drawn down to more traditional levels, end-use demand will have to recover from the current COVID-19-reduced levels.