News out of China had a substantial impact upon the cotton market again Wednesday. We pointed out Tuesday that Chinese officials had indicated they would continue their recent program of selling older cotton stockpiles during the weeks and months ahead. That was not very supportive of the short-term outlook, but their statement that they would continue their policy of buying and stockpiling the white fiber in an effort to boost domestic prices in 2013 undercut pessimistic views of the new crop outlook.
Their latest comments were ostensibly bearish for the short-term outlook, since bureaucrats announced that they plan to accelerate the pace of sales out of old crop inventories during April. Moreover, they reportedly plan to include a sizeable portion of high-quality cotton in those sales, which might reduce their buying on the international market. ICE cotton prices might suffer significantly in such circumstances.
As one would expect, the New York market did not react well to that news, as exemplified by the May contract dip to an early low at 87.13 cents/pound. That might easily have been interpreted as fresh reason for the nearby future to test chart support associated with its 40-day moving average (MA) around 85.50 cents/pound. However, prices stabilized around mid-morning and moved strongly higher late in the day. We saw no news that might have powered the rebound, so we are inclined to credit pragmatic reasons for the move.
We would particularly highlight the fact that cotton futures behaved very much like their counterparts in the grain and soy markets, with traders apparently favoring bull spreads prior to the Thursday morning release of the quarterly Grain Stocks and Prospective Plantings reports. The former does not apply to cotton, but the industry is certainly expecting a comparatively large plantings figure on the latter. How the market will react to the actual numbers is very much open to interpretation at this point.