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The Rupp Report: Lower Cotton Production And Higher Chinese Investments

Jürg Rupp, Executive Editor

According to the latest report from the Germany-based Bremen Cotton Exchange, the January US cotton 2008-09 supply and demand estimates include reduced production, domestic mill use and exports, resulting in ending stocks of 6.9 million bales - slightly below the previous month's estimate.

Lower Production
Production was lowered by 577,000 bales, mainly because of a reduction in Texas. Domestic mill use was reduced by 100,000 bales to 4.2 million, reflecting lower activity in November. The export forecast also was reduced by 250,000 bales to 12 million as a result of lower world import demand. The forecast marketing year average price received by producers - 44 to 52 cents per pound - was raised by 1 cent on the upper end and by 3 cents on the lower end of the range, as market prices have improved during the past month.

The world cotton estimates for 2008-09 show lower production, consumption and trade compared with the previous month. Beginning stocks were nearly 1 million bales higher as a result ot to prior-year adjustments in China, India and Turkey. Production was reduced by 1.7 million bales, mainly in India, the United States and Argentina. Consumption was lower in China, India, Pakistan and the United States, reflecting a continued slowdown in global textile demand; but was higher in Thailand.

Reduced Imports
World imports were sharply lower, according to the US Department of Agriculture, mainly because of lower consumption and imports by China. Exports were reduced in several countries, notably India, which accounts for more than half of the reduction in world exports. India's adoption of a minimum support price has resulted in sharply lower export commitments compared with last season. World ending stocks were 1-percent higher than last month's level.

In order to protect their farmers' income, China and India have dramatically increased government purchases to drive up domestic farm prices. These recent aggressive government purchases add a new element of uncertainty and potential price volatility to global cotton markets. Although there have been no official statements from either government regarding how these stocks will be managed, their disposition will certainly affect US exports and prices. If significant portions of stocks are held off the market, demand could shift to other suppliers, including the United States. However, release of these stocks could further dampen demand, particularly for US cotton.

Heavy Investments In China ...
China and India are on track to acquire nearly 25 million bales of government-controlled stocks in the next couple of months. Industry sources indicate that the Cotton Corp. of India (CCI) has authorization to purchase up to 11.7 million bales - half the 2008 crop. CCI has bought about 3.6 million bales - 40 percent of the cotton sold by farmers to date. China already has purchased more than 7.3 million bales of the 12.5 million it intends to buy. Continued weakening domestic demand has offset some of the effect of the purchase,s and farm prices have responded only moderately. According to industry sources, China already holds 4 million to 6 million bales of state reserves carried over from the previous season. These policies raise the question of how many government-stocks will be carried over into the next marketing year, and what impact the policies will have on production in these countries in 2009.

... For Petrochemical And Textile Sectors
In general, China is planning multi-billion-dollar aid packages for its petrochemical and textile sectors, as part of efforts to help key sectors through the global economic crisis. There is a plan on the way that China will spend 100 billion renmimbi ($14.6 billion) by the end of 2010 to upgrade refineries to ma produce cleaner fuels, the China Business News reported, citing unnamed sources. China will invest a further 400 billion renmimbi ($58.4 billion) on 20 new projects related to the fuel-upgrading initiative, as well as on the overseas acquisition of oil and some fertilizer assets.

The Chinese government also is drafting a stimulus package for the textile industry, including preferential loans, to boost sales and create jobs, according to another source. The plan has been submitted to the State Council and is expected to be issued soon, the source added without giving further details. China's textile industry had a hard year in 2008, with profits in the first 11 months falling by 1.8 percent - the first decline in a decade.

January 27, 2009