Sales of reserve stocks by China and fresh data indicating that Hurricane Isaac inflicted minimal U.S. crop damage have contributed to pushing cotton futures toward a chart support area.
Benchmark December lost 95 points during the week ended Thursday to close at 75.99 cents. It retreated from repeated intraday probes above 77 cents to a double low at 74.80 cents, remaining within the 289-point range from 74.60 to 77.49 established on Aug. 21.
December entered the holiday-shortened trading week having posted an 8.3 percent gain for August, the largest one-month advance since February last year despite a poor fundamental outlook. It sank as buyers stepped aside after the holiday and then snapped a two-day downswing to rally from near an uptrend line when stock markets soared and the dollar fell.
Cash grower-to-business sales increased to 6,341 bales from 4,676 bales the prior week. Prices fell to an average of 67.76 cents from 71.13 cents as premiums over loan repayment rates declined 139 points to 16.75 cents. Daily average prices ranged from 66.76 cents to 70.28 cents.
Traders viewed the launching of sales from ChinaΆs strategic reserves as underscoring talk that the worldΆs largest cotton consumer would seem unlikely to issue additional import quotas anytime soon.
China offered a total of 120,964 metric tons (555,600 bales) during the first three days of auctions and sold 88,873 tons (408,186 bales) or 73 percent. New-crop procurement is expected to begin soon.
U.S. 2012-13 export commitments to China totaled 1.911 million bales as of Aug. 23, down about 258,000 bales from a year ago. China has booked 42 percent of the U.S. sales to all foreign destinations.
China has indicated it will auction off 200,000 to 300,000 metric tons (918,600 to 1.38 million 480-pound bales) of its strategic reserve at a floor price of 18,500 yuan per ton (around 133 cents per pound).
The cotton apparently is from the domestic crop of 2011-12 and was bought by the China National Cotton Reserves Corp. at a support price of 19,800 yuan per ton last season.
Although the sales volume is a small portion of ChinaΆs strategic stocks, it is said to mark a significant departure from the past because it is the first time that reserve cotton is being sold at a loss.
ChinaΆs cotton policy likely will be the most important price factor this season, many analysts have agreed, and itΆs still uncertain how it will play out.
China appears to face a big dilemma, a trade analyst said, because it not only has accumulated over 4 million tons in reserve stocks consisting of both domestic and imported cotton but continues to support purchases this season at 20,400 yuan, significantly above both the local and international markets.
Traders took note of an International Cotton Advisory Committee report highlighting that demand destruction is plaguing the cotton industry. New ICAC supply-demand estimates preceded updated USDA domestic and world forecasts scheduled for Wednesday.
World cotton mill use rose from 18.6 million tons (85.4 million bales) in 1998-99 to 26.7 million (122.6 million bales) in 2007-08 but has fallen each season since to 22.726 million tons (104.38 million bales) in 2011-12, according to ICAC.
Consumption is forecast by ICAC to recover 2.3 percent from 2011-12 to 23.24 million tons (106.74 million bales) this season.
BeijingΆs policy of maintaining a minimum support price for farmers of approximately $1.40 per pound and enforcing the minimum price with import quotas and a sliding scale tariff ensures that cotton mill use in China will continue to erode, ICAC says.
ChinaΆs mill use this season is estimated at 8.6 million tons (39.5 million bales), unchanged from last season but down from a peak of approximately 11 million tons (50.5 million bales) five seasons ago.
The loss of cotton consumption in China is being offset by rising polyester and rayon use, resulting in a rapid decline in cottonΆs market share. Cotton mill use is rising or holding steady in other large countries, including India, Pakistan, Turkey and the United States.
World cotton production is estimated at 25.2 million tons (115.75 million bales) in 2012-13, down 7 percent from last season but still above consumption. Global cotton trade is forecast at just 7.33 million tons (33.67 million bales), the smallest in four seasons and down about 22 percent from last season.
With production again exceeding consumption, ending stocks are forecast to rise to 15.93 million tons (73.17 million bales), up nearly 5 percent from the estimate a month ago and 14 percent from 2011-12.
The stocks-to-use ratio outside China is projected to rise to 62 percent, highest since 1965-66, when it was the United States, not China, that was operating what ICAC aptly called a de facto world cotton buffer stock in an effort to support domestic farmers.
On the crop scene, U.S. cotton ratings dipped marginally during the week ended Sept. 2, USDA reported, with good to excellent down a percentage point to 42 percent, fair up a point to 30 percent and poor to very poor flat at 28 percent.
Cotton rated good to excellent was 10 points behind the 10-year average. The report indicated cotton sustained little damage from the hurricane, which bypassed major crop areas in the Mid-South and Southeast with the heaviest rains and strongest winds when it moved inland.
Conditions declined in Arkansas, Georgia, Kansas, Louisiana and North Carolina; improved in Alabama, Arizona, California, Mississippi and South Carolina; and held steady elsewhere, including Texas.
Boll opening advanced 12 points to 36 percent, down a point from a year ago but six points ahead of the five-year average. The Texas crop reached 31 percent open, up 10 points for the week, four points behind last year and eight points ahead of the 2007-11 average.