New China Cotton Policy Will Create Shifts and Changes, but Should Stabilize Long-Term Price

Occasionally, something comes along and grabs your undivided attention like the sharp, crisp crack of a whip. There was big news in the cotton market this past week, but it seemed to pass by with little fanfare.

Over the weekend past, Chinese authorities announced that the State would no longer support a strategic reserve for cotton. The meaning – clear, plain and simple – was that cotton production and cotton-related industries would no longer be shielded from the forces of the free market. Also that weekend, the price of cotton in India began to drop following the prior week’s increase that led New York 400 points higher and retested the 88 cent level.

With New York set to drop on Monday’s opening due to the weakening Indian price, the market reversed and moved higher in response to the Chinese announcement, leaving most in the market asking, “Why are prices moving higher, when they should be moving lower?”

What was misunderstood by most – but not by the market – was that the announcement out of China was bullish, not bearish.

The Chinese announcement was the punch that slammed right into the middle of the cotton market, screaming bullish all the way. The State no longer felt it was necessary for China to devote significant land area to cotton production. It indicates that Chinese domestic textile mills – those that are needed – can source their raw cotton on the free market.

Put another way, it means that the large multitude of old, outdated textile mills, along with their massive employment base, are no longer a priority for the State. The old mills are too inefficient to operate, and the labor force is already transitioning away. Other industries have surpassed the textile industry, and the country’s economy remains well entrenched on its path of change and its longer-term trek toward maturity.

Just as it occurred in Europe of the 1800’s, Japan and South Korea in the late 1900’s and the U.S. in the early 2000’s, the textile industry has now laced up its track shoes as it departs China. There is nothing spectacular about it. It is just the way the world turns.

While the industry has – and will keep – a footing in Indonesia, Malaysia, Bangladesh and a few other locations, the darlings (or soon-to-be darlings) of today’s world cotton industry are Vietnam, Cambodia, Laos and Myanmar (Burma). Vietnam and Bangladesh are the current hot spots, and Vietnam will get hotter.

India also has a long history of textile production, and I have long claimed that one day it will have the world’s largest textile industry. It has surpassed all but China and will do that sooner rather than later.

The Chinese announcement telegraphed its intention that it would close its national reserve in a very orderly marketing way so as to not impact the world market. It is definitely in their best interest to do so. The impact in-country will be to allow both cotton plantings and production to decline, allowing other countries to seed more land area to cotton than thought just weeks ago.

That is not to say there will be an explosion in world plantings. On the contrary, planting will likely be down during the coming season, yet the planters will roll just a little bit longer in coming years. The U.S. will be firmly entrenched with 11.0 to 11.5 million acres under cotton, likely into the 2020s. Yet, cotton will still be a commodity, and thus, will find favor mostly in those areas of low cost production regions.

Just two months ago, I began a switch to becoming a long term bear. The Chinese announcement changes all that. I may not be a big ol’ fat bull, but there is a lot of good grazing in front of me. Quality remains the key word and will keep a firm bottom in this market for months to come. The 82 to 83 cent level will be the low mark.

Leave a Reply

Market Analysis Stories

Market Analysis

Shurley on Cotton: New Round of Weakness Sets In

November 25, 2014

Merchants are now pricing cotton basis the March 2015 futures contract. But March futures – and all prices – are showing a new round of weakness.

Market Analysis

Plexus: Spec Movement Reveals Downside of Sideways Market

November 17, 2014

The recent trading action that pushed cotton prices into the 50s is linked to the interplay of spec short covering and spec long liquidation, which should keep the market in its current sideways trend.

Market Analysis

Prices Still on the Path to Nowhere

November 7, 2014

Cotton prices continued their path to nowhere and are expected to continue the same back and forth trading action, reinforcing the thought that the market has bottomed out.

Market Analysis

Prices Hint That the Market Bottom Is In

November 3, 2014

Goblins may continue to haunt the cotton market past the Halloween holidays. But the market is giving more signals that the bottom is in.

Market Analysis

With WTO Brazil Settled, Cotton Casts a Wary Eye on Chinese Policy

October 31, 2014

With the conclusion of the WTO Brazil case, the U.S. cotton industry can bring a renewed focus to the challenges ahead, coming from a familiar source.

Market Analysis

Shurley on Cotton: Lackluster Week Closes on a High Note

October 27, 2014

An end of week uptick closed the market up 81 points from the previous week. But the longer-term direction is still sideways, with a range of mostly 62 to 67 cents.

Market Analysis

Same Song, Same Tune – Market Sings the Low-to-Mid 60s Blues

October 24, 2014

The same record that has been spinning for weeks is still playing. The 61 to 62 cent price resistance holds firm, attempts to close above 65 cents continue to be thwarted, and the potential for a short covering rally lingers strong in the background.

Around The Gin

Product News

Americot Adds Another High Yielder for 2015

November 24, 2014

Americot rode to success on the performance of two top varieties in 2014. For 2015, the company is adding another workhorse variety to the stable.

Product News

CROPLAN a Brand to Watch for 2015

November 21, 2014

Growers familiar with CROPLAN corn and soybean varieties in the South may want to keep an eye on the company’s cotton program, too.

Product News

Deltapine Focused on Raising the Yield Bar in 2015

November 17, 2014

No brand of cotton seed was planted on more acres in 2014 than Deltapine. So it stands to reason that the company’s variety researchers are preparing to introduce monumental changes to their seed lineup in 2015.

Product News

Growth Continues for Dyna-Gro and All-Tex

November 13, 2014

Crop Production Services has put a two brand approach in place for its Dyna-Gro and All-Tex brands of cotton. And their varieties are getting stronger each year.

Product News

PhytoGen Gaining Foothold in West Texas Market

November 12, 2014

In a year that saw PhytoGen introduce several new varieties to the Cotton Belt, an old standard once again stole the headlines as the company looks to gain more of the Southwest market.

Product News

Monsanto, Sumitomo and Valent Extend Crop Protection Partnership

November 10, 2014

Monsanto, Sumitomo Chemical and Valent U.S.A. have agreed to extend their strategic partnership in Monsanto’s Roundup Ready PLUS Crop Management Solutions platform for U.S. cotton and soybeans.

Product News

Grow Ag Leaders Scholarship Program Includes Cotton Belt States

October 28, 2014

Grow Ag Leaders is offering more than $500,000 in college scholarships to students interested in agricultural careers. The program is available in 40 states, including many throughout the Cotton Belt.

Product News

Platform Specialty Products to Acquire Arysta LifeScience as Component for New Company

October 21, 2014

Platform Specialty Products has reached a definitive agreement to acquire Arysta LifeScience for approximately $3.51 billion.

Latest News

Market Analysis

Shurley on Cotton: New Round of Weakness Sets In

November 25, 2014

Merchants are now pricing cotton basis the March 2015 futures contract. But March futures – and all prices – are showing a new round of weakness.

Market Analysis

I Mean It This Time. The Bottom Is In.

November 24, 2014

I said it at 61/62 cents, so I’d best say it for 57 cents. The bottom is in.

Market Analysis

Plexus: Spec Movement Reveals Downside of Sideways Market

November 17, 2014

The recent trading action that pushed cotton prices into the 50s is linked to the interplay of spec short covering and spec long liquidation, which should keep the market in its current sideways trend.

Market Analysis

Shurley on Cotton: November Numbers Mostly Neutral, Prices Hold

November 11, 2014

USDA’s November crop production and supply/demand numbers are little changed from the October numbers.

Market Analysis

Prices Still on the Path to Nowhere

November 7, 2014

Cotton prices continued their path to nowhere and are expected to continue the same back and forth trading action, reinforcing the thought that the market has bottomed out.

Market Analysis

Prices Hint That the Market Bottom Is In

November 3, 2014

Goblins may continue to haunt the cotton market past the Halloween holidays. But the market is giving more signals that the bottom is in.

Market Analysis

With WTO Brazil Settled, Cotton Casts a Wary Eye on Chinese Policy

October 31, 2014

With the conclusion of the WTO Brazil case, the U.S. cotton industry can bring a renewed focus to the challenges ahead, coming from a familiar source.

Market Analysis

Shurley on Cotton: Lackluster Week Closes on a High Note

October 27, 2014

An end of week uptick closed the market up 81 points from the previous week. But the longer-term direction is still sideways, with a range of mostly 62 to 67 cents.

Market Analysis

Same Song, Same Tune – Market Sings the Low-to-Mid 60s Blues

October 24, 2014

The same record that has been spinning for weeks is still playing. The 61 to 62 cent price resistance holds firm, attempts to close above 65 cents continue to be thwarted, and the potential for a short covering rally lingers strong in the background.

Market Analysis

Plexus: Market “Boxed In” Between Support and Resistance

October 24, 2014

Volatility dropped this week, as the market is discounting a scenario in which prices are not expected to change significantly over the coming months. Once all harvest is complete and sorted out, we may see renewed pressure on cash prices.

Market Analysis

Sleepy Market Hiding Potential Volatility

October 20, 2014

Cotton trading remains locked in a rather wide ten cent trading channel, but actively trading only a four cent band around 63 cents – 61 to 65 cents, that is. In other words, maybe we are being lulled to sleep.

Market Analysis

Plexus: Market on Firm Footing Through Harvest

October 17, 2014

December prices should remain on firm footing until the bulk of the U.S. crop has been harvested and the quality is known. But the massive global inventory probably means a sideways-to-lower market going forward.

Market Analysis

Demand for Quality Cotton Keeps Market Positive

October 11, 2014

The market spent most of the week in positive territory, as its ability to close higher continues to voice the immediate need for quality cotton.

Market Analysis

Shurley on Cotton: Fragile Market Shows Improvement, Outlook Still Cautious

October 11, 2014

After recently falling to the 61-cent level, prices have made a modest, but still welcomed, recovery.

Market Analysis

Chinese Government Now a Marketplace Fundamental

October 6, 2014

The more things change, the more they stay the same. But through their recent actions, the primary fundamental in the marketplace has now become the Chinese government.