World Cotton Scenario 17th November, 2016

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Macro Economic Uncertainity WORLD COTTON SUPPLY & DEMAND STUCK IN BETWEEN BREXIT BREXIT BREXIT

Macro economic Factors FED likely to hike rate, albeit slowly – extenuate global strain Global growth to remain subdued – Europe, Japan continue to slow Developing countries controlling growth to fight off inflation Need to deleverage, tighten the belt and put house back in order Monetary stimulus lever has been overused having little impact going ahead Negative macroeconomic drag not a quick fix, could be a few years to overcome

World Stock to use Ratio Source: ICAC

World Stock to use Ratio

Starting (2010-11 through 2014-15) world accumulated unprecedented cotton stocks 12.956 million tons Most stocks held by Chinese government from purchases made under its stock piling policy 2014-2015, saw stock to use ratio of 0.70 highest level on record We are now heading for a continuous second year of decline in stock to use ratio forecasted at 0.58 World cotton inventories still remain extremely high An orderly reduction of stocks will be key element going ahead

World Area & Yield Source: ICAC

Following ending of China’s cotton stockpiling policy in 2014, international cotton prices have fallen by 22% to 70.78 usc/lbs, but have remained at this level during the first 5 months of 2015/16 In many countries cost of producing cotton is considered higher than other crops, making it less likely that farmers will switch to cotton As a result, cotton area fell by 1.8% to 29.985 million hectares in 2016/17, below the average of 33 million hectares observed for the past 25 years In 2015-16, world average yields fell to 12 year low of 690 kg/ha For first time in 12 years average yields fell below 700 kg/ha mainly due to poor monsoons, pest attacks in India and Pakistan resulted in steep production levels In 2016/17, average yields expected to be 750 kg/ha better but still below 10- year average of 770kg/ha

World Production & Consumption Source: ICAC

In 2015-2016 World cotton production fell to twelve year low level of 21.03 million tons Some revival in World production seen in 2016-17 Consumption 2015-2016 exceeded Production after 5 years Competition from polyester coupled with weak economic growth, no major revival seen in World cotton consumption Stuck in a range of 22.5 to 24 million tons since last 5 years Though, Cotton Consumption facing stiff competition from manmade fibers but expected at 23.8 million tons in 2016-17 While cotton’s absolute volume of consumption is likely to grow further, not expected to gain back much market share as it takes time for the market to adjust High prices & volatility witnessed 2010/11-2011/12 , made other competing fibres significantly gain market share since than High ratio of Cotlook ‘A’ to polyester at 1.70, diminishing the likelihood that cotton will regain market share from polyester

China Factor

China Yield & Area Source: ICAC

Scarcity of labour, rising production costs, and greater profitability from other crops are among the factors that have discouraged farmers from planting cotton in China New target price subsidy model, mainly focused on Xinjiang region Area fell to 66 years low of 3.10 million ha during 2015-16 In 2016-17, area further reduced to 2.89 million hectares

China Cotton Production & Consumption

Fifteen year low Chinese cotton production of 4.82 million tons Twelve year low Chinese cotton consumption Gap between production and consumption for 2016/17 forecasted at 2.5 million tons on deficit side. implies closing stock of China will reduce further to less than 9.5 million tons for the year 2016/17

China Historical Stock Policy Strategic reserve stock expected to come down to 7 million tons Million Tons Reserve Beginning Stocks Reserve Domestic Purchase Reserve Import Purchase Release Local Cotton Release Import Cotton Reserve Ending Stocks Total China Stocks Target Price 08/09 1.20 2.80 0.00 0.68 0.53 2.78 4.65 NA 09/10 0.94 0.18 1.66 3.10 10/11 1.04 0.62 2.31 11/12 3.14 0.80 0.26 0.08 4.22 6.77 $1.40 12/13 6.84 0.75 3.26 0.96 7.53 10.96 $1.45 13/14 6.58 0.13 2.22 0.15 11.88 13.65 14/15 0.31 0.07 11.50 14.79 11 to 14 16.56 1.69 6.05 1.26 10.93 $1.40+ 15/16 1.35 0.30 9.85 13.13 $0.975 16/17 ?.?? 2.45 6.40 11.04 $1.04? Source: USDA World Agricultural Supply and Demand Estimates

China’s Cotton Policy: 2011- 2014 Objectives Regain control of supply Support farmers Reduce dependence on imports Actions and Consequences State undertaking to buy the entire crop Purchases total 16.5 mil tons (2011-12, 2012-13, 2013-14) Intervention price well above the world market 2011 announced intent to support farmers at 19,800 yuan/ton ($1.35 to $1.40 per lb) 2012 : Increases support price to 20,400 yuan/ton ($1.40 per lb.) 2013 : Held support at 20,400 yuan/ton Imports beyond apparent needs 5.34 mil tons in 2011-12, 4.43 mil tons in 2012-13 and 3.08 mil tons in 2013-14 Rise in state reserve stocks Massive cotton yarn imports . More than 2 million tons of cotton yarn imports Absorption of world surpluses

China’s New Policy: 2014 onwards Open-ended support (2011/12 to 2013/14) at an end Target price system in Xinjiang 2014 - Change of strategy from reserve building policy switched to direct farm subsidies, target Price for Xinjiang at 19,800 2015 - Reduced target price to 19,100 yuan per ton 2016 - Reduced target price to 18,600 yuan per ton Much less support in other provinces Other provinces, direct support at 2,000 yuan/ton ($0.15 cents/lb) Restrictive import quota regime (894,000 tonnes p. a.) tariff rate quota (TRQ) as per WTO agreement Disposal of accumulated stocks 2015 - Reserve Fall auctions failed, Spring auctions surged 2016 - from May to 30th Sept 2.5 miliion tons sold by China Reserve

Big questions 1. Sustainability of Chinese Cotton Consumption 2. Role of Other Countries for Yarn Exports to China 3. How much further fall in Cotton Area is anticipated 4. How will Prices behave in Xinjiang in the near future 5. What will be the reserve price for 2017/18 6. How government will offload reserve stocks after Mar.17

World Major Cotton Importers Bangladesh becomes the largest importer, China drops to third Source: USDA World Agricultural Supply and Demand Estimates

In 2011-12, Chinese cotton imports more than doubled from previous season to 5.3 million tons surpassed total volume of imports by rest of world. However, following seasons, Chinese imports declined while imports outside of China have steadily grown Bangladesh and Vietnam replaced China from being largest importer to the 3rd spot To encourage consumption of domestic cotton, Chinese government limited import quota to (894 thousand tons) per WTO commitment

So where do we go from here… World cotton stock to use ratio is back at levels 0.58% in 2015-16 World Production somewhat better due to improved yields in USA, China, India, Australia & Pakistan despite losing overall area compared to 15/16 Cotton Consumption projected to exceed Production in 16/17 Demand still appears sluggish, any setback in the global economy will effect this projection Whilst, cotton statistical picture is bearish THE FLIP SIDE FED likely to raise rates while the other Central Banks still in easing mode Debasement of currencies to continue Easy money – Funds starting to chase riskier assets Hot money flow into commodities could again distort real fundamentals Already boosting global stock markets, commodity markets could be next in line

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