A week in cotton like no other! A sea of green hit our screens on a daily basis with limit up moves becoming normalised. We mentioned last week that dollar cotton might provide a psychological barrier, well that barrier was promptly toppled. December hit a high of 107.28 c/lb, eventually settling at 104.53. 

The trigger for such a move undoubtedly came from China where Authorities have issued quotas for mills to purchase foreign cotton from the bonded warehouses. The State Reserve were supposed to end their auctions on 30th September, however due to the continued demand for cotton these sales will be extended to keep up with the inquiry. There are fears of a shorter crop in China which may have been a contributing factor to these large purchases. 

With demand so strong out of China, it was no surprise to see purchases near 420k bales of US cotton in the week, the highest weekly number since 2013, and neither was it a surprise that the ZCE rallied close to 1800 points in the week. 

At the same time, the specs added close to 14,000 longs, their bets now very clear. With unfixed on call sales at record highs, the specs bet on the long side comes with ‘limited’ risk. 

While in terms of cotton China has been buoyant, the economy itself is showing signs of faltering. This morning Evergrande issued a trading stop on their shares in Hong Kong as they look to raise cash to service their debt. This year shares in the indebted property company have fallen 80%, and a collapse would no doubt have long reaching effects on their economy and the world. 

The global economy is not recovering from the pandemic as fast as expected with some significant bumps in the road. The spreading Delta variant continues to disrupt schools and workplaces in the US. China is suffering an energy crunch and pursuing a regulatory crackdown, while as already mentioned markets remain on edge as Chinese company Evergrande Group struggles to reimburse its massive debts. 

Fuel and food costs are soaring, combining with congested ports and pressured supply chains to elevate prices for consumers. Inflationary pressure is weighing on markets globally as interest rates will no doubt have to rise to combat the move, in turn strengthening the dollar against all currencies. Will the fears over the global economy put a stop to cotton’s unabated rise? 

Pakistan reported this morning an impressive arrivals figure of 3.8 million bales as of 1st October. Taking an average yearly yield, the crop is on course to produce close to 9 million bales. While this is significantly improved, consumption is close to 16 million bales, so there is a gap still to be filled. 

With such strong prices on NYF it is understandable that mills took a back seat last week as the yarn market prices could not keep up. The market is now significantly inverted, which means that traders carrying stocks will be pressured to sell, in turn potentially leading to a weakening of the basis. That said, a weakening basis his hard to argue for with the ever increasing shipping costs. 

China is on holiday this week, so the market might be quieter, though it might take the holidays and a faltering economy to put the brakes on the China train.