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China to auction cotton

China will start selling its cotton stockpile this year. The plan is to auction off one million ton, or 4.6 million bales, of the fiber to start with. In previous auctions, widespread complaints about the quality of cotton being released caused some mills to balk at buying supplies. To help get the cotton moving, China offered incentives tied to import access. Over the past year, only the minimum amount of import quota was issued. If reserve sales are very slow, those incentives could eventually reappear.

The possibility of rotating reserve stocks is another thing worth paying attention to. Historically the Chinese government has replaced older supplies with newer ones. It isn’t clear yet whether that will be a possibility in the future, but if it is, that could impact the availability of current and future Chinese harvests.

The bottomline is that the changes made in current crop year, where Chinese imports have placed increased emphasis on the use of domestic supplies, will be sustained. The corresponding sustained reduction in global import demand has helped stocks outside of China increase and allowed prices to shift lower.

As long as China keeps imports low and uses reserves to fill any gaps, and as long as the rest of the world produces a surplus of cotton, stocks outside of China will remain strong and prices can be expected to remain low.


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