China Still Sits Heavy on the Market
March 21, 2016 Going into last Friday’s trading, cotton prices had eased higher in five of the prior six sessions. A few shorts had been chased out, and the bulls were feeling their oats.
Then came Friday’s triple digit losses as fears of Chinese selling exploded. Thus, it’s the same song, but with the 56-57 cents lyrics playing again.
The short covering rally gave us two cents. Now it is time to look at the Chinese tea leaves once more. The 60 million bales of Chinese reserve stocks (about 4.5 times the total 2015 U.S. crop and 16 times U.S. carryover), as commented last week, sits as a heavy, heavy hat on cotton prices. There is little reason to break above the 59 cent price resistance facing the market. It is also likely the 54 cent price support will also prevail.
Thus, the narrow five-cent trading range will likely prevail until and unless Mother Nature decides some changes are in order during the fast approaching Northern Hemisphere planting season.
Granted, the Chinese are paying an exorbitant amount to store 60 million bales. Yet, their reserve stocks are both old (generally four years and older) and are below strict low middling 1-1/16 inch staple. Therefore, the quality is below average at best – and, given its age, will move only at 50 cents, basis farm level price and below.
However, the kicker is that anything cheap enough will sell. In an earlier report, I mentioned my dentist friend Starr and his deep appreciation for cheap wine. China has lost much of its yarn business because Chinese mills could not afford the non-completive state price and had ceased operations rather than access the government cotton. However, assuming that the government lowers the price (and they will), the stocks will move.
The concern facing the market is the government will also offer reserve cotton for export. It is that concern that sits on the market. Yet, it is unlikely they will offer the cotton for export, but instead will offer the cotton only to Chinese mills. This week’s rumor was that they would offer the cotton over a five-year period so as not to dump it on the market. That could be. But remember, it is already 3-5 years old, and that is already considered as “old.”
The background to this is that the world’s supply of high quality stocks continues to shrink. Coincidence then will work in favor of the U.S. grower, given his intentions to plant 9.4 million acres.
While I am a recent convert to the idea that U.S. plantings will reach this high, the planting season alternatives simply suggest that all regions of the U.S. should increase plantings. The world needs to boost its supply of high quality stocks, and 2016 is positioned for the U.S. to be the only country to effectively do so. Other major producers are located in the Southern Hemisphere, and the bulk of their harvest will not be until 2017. Plantings will increase in all regions of the U.S. as expected yields and quality premiums for cotton promise more than returns from alternative crops. Too, demand exists for such an increase.
Weekly export sales and shipments continue to meet expectations, especially with ICE below 60 cents. Major buyers year to date include Vietnam (1,358,900 RB), Turkey (1,328,300 RB), and Mexico (1,016,500 RB). China is still a major buyer with 476,900 bales. Total sales to date are 7,402,400 bales, compared to 9,911,000 last year at this time. Thus, both commitments and shipments suggest the USDA export estimate of 9.5 million bales will be reached. Actually, the current pace of shipments suggests that exports could be as much as 400,000 bales higher than the current USDA estimate.
While some speculative shorts have exited the market, banking sources suggest that major Chinese-based funds have tended to maintain their short positions. They will be heavily rewarded if the government does dump cotton on the export market. However, they already have handsome profits, and it is more likely that they will be forced to exit those positions – which will, in turn, pressure the nearby contract to near the 59-60 cent level. Nevertheless, look for the price resistance to keep the market from moving above that level.
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