1. World Cotton Scenario
17th November, 2016

2. ????
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3. Macro Economic Uncertainity
WORLD COTTON SUPPLY & DEMAND STUCK IN BETWEEN
BREXIT
BREXIT
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4. 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

5. World Stock to use Ratio
Source: ICAC

6. World Stock to use Ratio

7. 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
, 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

8. World Area & Yield
Source: ICAC

9. Following ending of China’s cotton stockpiling policy in 2014, international cotton prices have fallen by 22% to 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 million hectares in 2016/17, below the average of 33 million hectares observed for the past 25 years
In , 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

10. World Production & Consumption
Source: ICAC

11. In 2015-2016 World cotton production fell to twelve year low level of 21.03 million tons
Some revival in World production seen in
Consumption 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
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/ /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

12. China
Factor

13. China Yield & Area
Source: ICAC

14. 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
In , area further reduced to 2.89 million hectares

15. China Cotton Production & Consumption

16. 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

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

18. 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 ( , , )
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 , 4.43 mil tons in and 3.08 mil tons in
Rise in state reserve stocks
Massive cotton yarn imports
. More than 2 million tons of cotton yarn imports
Absorption of world surpluses

19. China’s New Policy: 2014 onwards
Open-ended support (2011/12 to 2013/14) at an end
Target price system in Xinjiang
Change of strategy from reserve building policy switched to direct farm subsidies, target Price for Xinjiang at 19,800
Reduced target price to 19,100 yuan per ton
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
Reserve Fall auctions failed, Spring auctions surged
from May to 30th Sept 2.5 miliion tons sold by China Reserve

20. 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

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

22. In , 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

23. So where do we go from here…
World cotton stock to use ratio is back at levels 0.58% in
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

24. Thank You