A Change in China’s Cotton Policy Is Coming. Just Don’t Ask When.
“The Chinese like price stability,” he explained. “They like the market between 70 and 90 cents, without big spikes or valleys. They know they don’t want as much cotton as they have. But if market continues to fall, they’ll come in and buy again, even though they have 60 million extra bales on hand. They have to figure out how to reduce that inventory without it becoming a big market factor.”
Tancredi admits that today’s marketplace is rife with rumors being reported as fact. And, any facts that are being accurately reported could be market movers. The key is to get legitimate confirmation on any and all market information.
“For the most part, don’t buy anything unless you get confirmation,” he suggested. “In this particular case, you may be better off being second and getting it right than being first and getting it wrong.”
What does all of this mean while the market waits for direction from China? Current market situations indicate cautious movement.
“For the last four years, the marketplace felt it was one trade away from going over a dollar anytime it was under it,” stated Tancredi. “The U.S. cotton situation was tight, yet China was masterful in showing enough interest that people were afraid they would take a little more cotton and the U.S. would go deficit on stocks.”
The turning point came with the West Texas rains in late May. In a three-week period, the market shifted from concerns over a small crop and low carryover to reports of an 18 to 20 million bale crop.
“The bearishness that has infected this marketplace has come so fast because of West Texas and the inactivity of the Chinese,” said Tancredi. “All of a sudden, we have a five million bale carryout in the U.S. The marketplace is now telling us it has too much U.S. cotton. That’s the fall into the 60’s.”
China’s import history indicates that eight million bales of U.S. cotton should be going to China, according to USDA. Tancredi says that’s not an outrageous assumption, even though the Chinese have stated they want to reduce imports to 1.5 million bales, but also have no problem importing more when they need to.
“That means they can do anything, and there’s no direction,” he explained. “That’s what China continues to lead the market with.”
And what if China does decide to back off imports? Tancredi stresses that the market needs to understand all potential outcomes and not make assumptions that could turn out wrong.
“If China doesn’t import like they say, that means at least 1.5 million bales go straight to the U.S. carryover,” he stated. “And if the crop gets bigger, it all feeds right into the ending stock, and we have a big problem. If we don’t find a way to export, we have a problem with price, and that price could begin with a five. Or less.”