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Chinese Government Now a Marketplace Fundamental

The more things change, the more they stay the same.

Cotton prices continue to sit at the very bottom of the 62 to 72 cent trading range. Hanging onto its 62 cent support only by a thread, the nearby New York December contract eased back above 62 cents on a good trading day at week’s end. All week, the market flirted with a hard 61 cent trade, which would have begun setting off some sell orders. However, good mill buying held prices at the 62 cent mark.

The 62 cent level has proven super tough to penetrate, but the mills’ perception is that prices are moving lower. The great unknown Chinese government action continues to loom over the market with the weight of an oversized lead cap.

The world’s textile mills have reverted to simply buying hand to mouth as they “know” prices are moving lower due to the Chinese government’s actions and seemingly conflicting announcements – the Government will not sell from the reserve for 12 months…they will sell from the reserve about March 15…they will sell from the reserve once supplies become tight…they will not allow imports to exceed the WTO minimum requirements…they will micromanage a free market cotton market system…they will announce processing quotas later in the year…and the list goes on.

This hand to mouth buying paints a discouraging picture across the face of mill demand. Thus, international mills, more so than ever, have taken the attitude that they do not need to buy forward any cotton. Additionally, Chinese mills have reported the purchase of SM 1-1/8 inch cotton for as low as 61 to 63 cents – a seemingly dreadfully low price for 2014 crop cotton.

That is, the primary fundamental in the marketplace has now become the Chinese government. Thus, the marketplace is chock full with rumors, some of which will likely become true. Yet, to date, the Government has done one thing they said they would do – “We will let the price fall as low as it wants.” That is, we will subsidize growers such that their price received from the market and from the subsidy will be between 114 to 140 cents.

Based on the belief that such a commitment will continue to be true, futures market prices will likely move lower. But that does leave me vulnerable to any decision by the Government to either allow processing imports (the more domestic Chinese cotton the mill spins, the more imports it can bring in) and/or the total stoppage of selling reserve stocks for the entire marketing year.

Additionally, any lower price scenario also discounts the assumption that the U.S. crop will likely get smaller and is losing quality due to continued rains in Arizona, the Southwest and the Southeastern states. Moisture is not welcome on any cotton in the Northern Hemisphere from now through the end of the harvesting period. It can only represent the face of yield and quality deterioration.

The forthcoming USDA October supply demand report on October 10 will likely include a smaller U.S. and world crop, a smaller U.S. and world carryover, and a somewhat unchanged consumption estimate. Too, both the Chinese and Indian crop estimates are likely to be lower.

In the backdrop of all this, both U.S. and world consumption are set for a major boost in 2015, as equipment manufacturers for the spinning industry report as much as a one year backlog in orders. Additionally, both Chinese and Indian investors are discussing building new spinning operations in the U.S. The thought is that it is less expensive to ship the yarn than the raw bales overseas.

Additionally, the U.S. has one manufacturing process in which it can still claim world superiority – when a light or heating switch is turned on in the U.S., light or heat are forthcoming 99.9 percent of the time. Those limitations in other countries are beginning to have an impact on the cost of manufacturing.

While the U.S. is far from any increase in its cut and sew operations, the yarn spinning industry is back on its upward growth curve, and U.S. domestic consumption will increase further.

 

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