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Europe Wrestles with Concerns about Weather, Oversupply, Defaults and Logistics

REPORT BY DAVID JO EARLAM

Co-Founder, International Agribusiness Partners Ltd. (IAP)

According to USDA, cotton production in Turkey, Greece and Spain combined will account for just 4.26 million bales out of the world’s estimated 111.25 million bales for the forthcoming 2015/16 season.

That’s less than 4% of overall global production, so at first glance, it might make the region seem relatively unimportant. However, that small amount of cotton plays an important role because both Greek and Spanish cottons are recognized as two of the few machine-picked, non-contaminated cottons of the world and are well liked by the main cotton consuming markets.
On the consumption side, the spinning capacity of Spain and Greece has been dropping for years and suffered through a difficult 2014/15 season, and the Turkish spinning fraternity struggled as well. It has been well documented that the largest spinning mill in Turkey was forced to stop production until just recently, and while it is now up and running again, it’s at a greatly reduced capacity.

Turkish spinners have struggled but the country remains a huge cotton consumer.

Turkish spinners have struggled but the country remains a huge cotton consumer.

Despite the recent difficulties, Turkey remains one of cotton’s top five import markets in the world, accounting for more than 10% of total world trade – 33.65 million bales – a large proportion of which comes from the United States.
Spain’s production of 300,000 bales is going to be down by 20% from last season and, as is usually the case, as much as 20% to 25% was marketed to merchants long before the crop was actually produced. The cotton is sold on an ex gin basis against December New York futures, with ginners’ option to fix.
Quality can range from a Slm Light spot 1.1/16 up to SM 1.1/8. It is a little early to know the quality of this year’s crop but it was planted in good time and will be available for shipment from late September onwards. Merchants are known to be forward offering at below 1000 on Z15 into the traditional Far East markets for a 41-4 style cotton.

Weather and Oversupply Remain Concerns in Greece
Greek cotton is rather less well sold from origin, with less than 5% of their crop having been marketed so far – a direct result of the high price being asked by ginners at origin. Their cotton is also sold against New York basis FOT Greek gin. Due to rains, the crop was planted about 3 weeks late, and unless there are ideal growing conditions and plenty of heat in the coming weeks and months, that means the harvest will be 1-2 weeks late at a minimum, with the risk of the crop being rained on in the crucial October harvest period now a distinct possibility.
As a consequence, merchants will understandably be reluctant to offer the desirable Middling style 1.1/8 cotton preferred by spinners. They would be taking a big risk on the weather and shipments are unlikely to take place before the second half of October. The production is not thought to be very different from last year, despite reduced plantings, and but there is a good chance yields will improve (they were well down from their five-year average in 2014/15). As much as 20,000 tonnes of old crop stocks are still available, and those are losing positions for ginners. There are few friends for this cotton because of the high prices being asked for what is a low grade 61/62 grade cotton with 1.3/32 staple G5 Mic and strength of just 26Gpt.

Defaults and Currency Concerns
Ginners in Greece come in two guises: those who are on the default list and those who are not. This is the result of the New York price spikes in 2008 and 2011 that resulted in many not performing their sale contracts. Many of these issues are finally being resolved but it will probably still take years before the monies are sorted out. There is an over-capacity of ginners here, some of whom have joined forces in order to survive, and it seems competition to buy the farmer’s cotton will mean the ginning business will remain a difficult one to make money from!

European ginners are keeping a close eye on currency trends.

European ginners are keeping a close eye on currency trends.

Spain faced a similar situation some years ago before they were forced to reduce ginning capacity, and as a result, the remaining Spanish ginners seem to have a rather more viable business outlook than many of their European neighbors. It would seem likely that Greece will eventually face the same attrition, but at this stage, no one is quite sure when that will happen.
European subsidies for cotton are expected to continue for the next four years, meaning that cotton production in Europe is here for a few more years, at least!
Because farmers are paid by ginners in Euros, and almost all of the cotton is exported in U.S. dollars, there is an element of currency risk. As a result, ginners have a keen interest in the direction of the U.S. dollar against the Euro. Over the last year, the U.S. dollar has appreciated by as much as 25% against the Euro, so it is not surprising that currency movement is every bit as important as the price of cotton for both Greek and Spanish ginners.
Greece has always marketed 30% to 50% of its crop to Turkey, and the forthcoming season is not expected to be any different. Turkish spinning mills seem to be happier about the current prices of raw cotton than they have been in many months, and although consumption is likely to be 10% less than the USDA estimate, profitability seems to be improving. Cotton production in Turkey is estimated at 600,000 to 640,000 tonnes, compared with nearly 700,000 tonnes last season. Almost all of it will be consumed domestically.

Speed Is a Critical Factor

Greece's Port of Pireaus, the largest container port in the East Mediterranean Sea Basin.

Greece’s Port of Pireaus, the largest container port in the East Mediterranean Sea Basin.

Much of the imported cotton will come from the United States and Greece, but fiber from Central Asian cotton-producing countries like Turkmenistan and Tajikistan also remain very popular. Like Greek cotton, in which transit takes only two to seven days, Central Asian cotton can be trucked quickly to Turkey in less than two weeks from origin. Numerous and reliable bonded warehouses near Mersin, as well as the Mersin free zone, allow merchants to store and market their cotton ex warehouse, and they also have the option to re-export to other parts of the world such as Bangladesh at favorable shipping rates.
Mersin may find it has some competition with the recently established Piraeus free zone in Greece. The Cosco Group, in conjunction with the Greek government, has invested 380 million euros in upgrading areas of the port, and even more investment is planned for the near future. The strategy is to use Piraeus’s advantageous geographical location as a hub for combined transport of cargoes that can be redistributed by road, rail and sea through a well-respected forwarding agent. For cotton, this means Greek and other foreign cottons can be stored free of the value-added tax (VAT), and shipments can be made to all main cotton buying countries with short transit times, regular sailings and competitive rates, all factors that are attractive to many of the larger merchants.
Europe may not be the biggest cotton producer in the world, but it is strategically placed to service the main cotton-consuming markets of the world through competitively priced transit ports like Mersin and Piraeus. It is thought this could attract foreign cottons and competitive financing by banks, meaning Europe will remain important in the world of cotton for the foreseeable future.

Sourse: The Cotton Year Book

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