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China Said to Buy 1 Million Tons of U.S. Cotton for Reserves

China, the world’s biggest cotton user, is seeking to buy 1 million metric tons of new-crop output from the U.S. to boost government stockpiles, according to two executives familiar with the matter. Prices climbed.

The China National Cotton Reserves Corp., which stockpiles the commodity on behalf of the government, has bought 160,000 tons since last week, said the executives, who declined to be identified as they aren’t authorized to speak to the media. Phone calls to the state company today weren’t answered.

Purchases by China may help futures post a second weekly gain. New-crop cotton in New York is about 48 percent cheaper than that traded in China’s Zhengzhou, according to Bloomberg data. It’s still more than 20 percent less than local cotton after freight costs, the two executives said. State stockpiles would be expanded, the top planning agency said last month.

“The Chinese government has become the most important factor in global demand and supply,” said Dong Shuangwei, a senior analyst at Beijing Capital Futures Co. “We call it a ‘policy market,’ driven by the Chinese government stance on cotton because the fundamentals still paint a rather gloomy picture.”

The global cotton market will have a surplus of 2.226 million tons in 2012-2013, down from this year’s glut of 5.056 million tons, according to projections from industry researcher Cotlook Ltd. in a May 24 report.

Futures Climb

Cotton for December delivery gained 1.3 percent to 71.49 cents a pound on ICE Futures U.S. at 4:27 p.m. in Shanghai. The most-active price has risen 2.3 percent this week, extending last week’s 3.4 percent gain. Over the past year, cotton slumped 43 percent as world supply exceeded demand.

The December contract advanced as much as 3.8 percent yesterday after the U.S. Department of Agriculture reported that exports gained fivefold in the week to June 7 from the previous week. The sales figures were “absolutely monster,” according to Mike Stevens, an independent trader in Mandeville, Louisiana.

Cotton stockpiling is set to continue in China with purchases from local farmers, Zhang Xianbin, director at the economic and trade department under the National Development & Reform Commission, said at a forum last month. The commission shapes economic policy in China.

Cotton reserves in China are set to increase in the year to July 31, 2013, according to the International Cotton Advisory Committee. Imports by China may drop to 13.5 million, 480 pound (218 kilogram) bales in 2012-2013 from 23.25 million bales a year earlier, according to the USDA.

China has an annual quota for imports to regulate shipments. While quantities within that allowance are taxed at as low as 1 percent of value, shipments above that threshold face a rate of as much as 40 percent. Government imports for stockpiling aren’t included in the quota, the executives said.

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