Cotton Prices Fall on China Concerns

http://online.wsj.com/news/articles/SB10001424052702304391204579177322368742800
By
ALEXANDRA WEXLER
Updated Nov. 4, 2013 7:48 p.m. ET

Cotton prices have fallen to their lowest levels this year recently on signs that China is gearing up to release cotton from their reserves. China’s cotton reserves are controlled by a state run company that traders expect to sell some of the reserves by the end of the year. The most likely buyers are Chinese textile mills which currently import much of their cotton from farmers in the US. In late 2011, China began to purchase cotton to fill its stockpile, encouraging farmers around the world to step up production and keeping supplies tight. Currently, three of every five pounds of cotton is in China’s reserve, up from one in five early in 2011.
The cotton in China’s reserve is of very poor quality, and Chinese textile mills generally prefer higher quality cotton from overseas. The selloff of poor quality cotton will make even the higher quality product more affordable for mills.

Commentary

Overall, a reduction in the price of cotton is a good thing. It means lower prices for consumers and increased profit for clothing manufacturers and producers of other products that use cotton. However, it’s curious to me that since 2011 China has propped up the global price by buying cotton to fill up its reserves, only to begin dumping it by the end of this year. Also, according to the article, the cotton in the reserve is of such low quality that “Even if all the cotton is dumped into overseas markets, no one would buy it anyway.” The article also mentions that cotton prices in China are high, pushing the nation’s textile mills to import, chiefly from the US. So…the Chinese government buys up cotton, encouraging increased production worldwide, then decides to begin to sell off the lower quality stock, thus lowering prices even on higher quality cotton.

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About helpterriout

I'm fifty years old, married with three kids and two grandkids. After losing my customer service job in 2008, I've gone back to school. Right now, that's the main focus of my life.
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