Cotton futures fall as China announces massive sale

Cotton futures fall as China announces massive sale

Cotton futures fell on April 15, 2016, after China released details of cotton auctions that will see some of the governments huge stocks released onto the market

Chinese officials will release up to 2 million tonnes of cotton from its reserves, between the start of May and the end of August 2016, when the domestic harvest begins.

Daily sales will be up to 30000 tonnes, with prices based on international and domestic prices in the run up to the sale.

Fresh sales could begin in February 2017.

Failed auctions

The Chinese government is holding an estimated 11m tonnes of cotton, accumulated during a now-abandoned price support programme.

Previous attempts to shift the reserves have been unsuccessful.

The government held a series of cotton auctions last year, offering 1m tonnes of the fibre, but only managed to sell about 60000 tonnes. Cotton broker Keith Brown told Agrimoney that these sales looked more likely to reduce the reserves, with prices weaken

Cotton futures fell on the news, as the availability of local supplies is likely to supress Chinese export demand. “We knew this was coming, but to see it in print is bearish, and so the market has responded accordingly,” said Brown. He noted that “long term it is friendly,” as it will put a dent in the huge cotton stocks that have been supressing global prices. “They have been a factual and literally bearish fact on the market, but now it’s more mental than anything,” he said.

Quality question

Indeed, there is no clear idea of just how much of the cotton reserves are of a reasonable quality. “We have no clue, and nor do they I think,” said Brown. “When I was in China, I saw they have cotton stored in modern warehouses, and they have cotton stored outside on the ground”.

Authorities intend to offer imported and higher quality cotton initially, but if large amounts of low-quality cotton do find their way onto the market, yarn spinners may still need to import cotton in order to blend with brittle, badly stored domestic supplies.

Are the stocks trash?

Brown noted that the actual results of the sales would be sending mixed signals to the market. “If the auctions go well, that really is friendly for cotton, but it’s a little simultaneously unfriendly,” he said, noting that it would mean less interest in US imports. If the sales do not manage to shift product, this means the stocks will stay in place, but it will send the message that “this cotton is trash”.

July 2016 cotton futures in New York were trading down 1.1 %, at US 60.17 cents a pound.

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