Little Market Movement As China’s Plans Begin to Emerge
September 19, 2014 Cotton appeared to have its head underwater all week as it dog paddled, choked and took on water most of the time.
A one day surge early in the week kept it afloat, and the week ended with the New York December contract holding just below 65 cents at 64.39 cents, but down near 200 points on the week. Thus, as suggested, the trading range continues and will likely to do so in the coming two weeks.
This short time span should not offer any clear analysis of the flooding and excessive rains in Arizona, New Mexico and West Texas, or any other market fundamentals as well. Therefore, the 62 to 72 cent trading channel should contain any and all price activity over the next 14 days. More specifically, the five cent band around 63 and 68 cents, basis December, should hold most, if not all, of the trades.
Volatility was the trading message all week as the market went through triple digit trading most days on its way to losing the aforementioned near 200 points. The market was caught between rumors of an impending announcement from China, the expected flooding in the U.S., continued dryness in Australia and – finally – the first initial official announcement by the Chinese government with respect to its new cotton policy.
The Chinese announcement was as most expected, but it was helpful to “finally” hear the government make its intentions official. Essentially, China will drop its direct price support of cotton and allow the price of cotton to seek the “market level.” That is, the price of Chinese cotton will be allowed to float on the world market.
Given the massive inventory of stocks held by the government, this is generally viewed as bearish and has been the reason the market has fallen from the high 80’s several months ago to the present day mid-60’s. Some are calling the announcement even more bearish than expected and are predicting that the New York ICE contract will drop below the 60’s and into the mid-to-upper 50’s. While I am not in that camp, I have recognized those thoughts from time to time in this newsletter.
Nevertheless, the government left major portions of the program unannounced, and the market reacted negatively in the absence of a full disclosure of the program. Additionally, it is a well-known fact that China will continue to import quality cotton in support of prices.
However, the government did announce it will move away from its direct price support program that led to overproduction and implement an income support program for cotton growers in the major cotton production region – an area that produces some 50 to 55 percent of the country’s production. Unknown still is whether the government will support the income of cotton growers outside the major production region, but all indications are that the government will not support cotton production in those areas.
If so, then the presumed bearishness of the announcement will be negated, as it will act as a significant curb to cotton production in all other regions. Too, this would be consistent with the other announced plans by the government, mainly that the “other cotton regions” move away from cotton plantings and switch to food grain, feed grain and oilseed production. That is, the Chinese government policy is to maintain a much smaller cotton production sector and to use imported cotton to maintain the same size textile industry.
China will remain a very active part in the market’s equation. However, given the weather difficulties that have occurred and are continuing over the weekend, a thorough discussion of the U.S. crop will be key during the early part of the coming week.
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