Dr. O.A. Cleveland
Professor Emeritus, Mississippi State University
Special for Bayer CropScience
The political decision of the Indian government to ban raw cotton exports sent prices limit up early in the week. However, by weeks end most of the gains had been lost. USDA released its March supply demand report and forecast ever larger ending stocks for both the U.S. and the world at the end of the 2011-2012 marketing year. The bearishness of the USDA report appeared to offset the bullishness of the decision of the Indian government.
In mid-January hedge funds bet heavily on the idea that the May/July contracts would move back near the 110-115 cent level, but over the last month those funds closed their positions. As the hedge funds closed their long positions, other large speculators sold the market on a belief of lower prices. Thus, the Indian governmentΆs decision drove those funds out of the market, creating a short covering rally that took the market limit up. All said and done, the market has returned to a state of “limbo,” that is, it is just trying to figure out what direction it will take…and of course the magic lies within China, not India or the U.S…And MAGIC it is!
LetΆs begin with USDA estimates for China and review the countryΆs supply demand scenario:
Data Source Million Bales Comment
Beginning Stocks USDA 11.6
Production USDA 33.5
Exports from China USDA 0.3
Available Supplies 45.4
State Reserve Purchases (13.4) USDA data from China
Balance 32.0 Available to Domestic Mills
Domestic Consumption USDA 43.5
Surplus/(Deficit) (11.5) Minimum Import Requirements
Ending Stocks USDA 20.1
Surplus/(Deficit) (31.6) Implied Requirements without Any Release of State Reserves
Imports to China USDA 18.5
Remaining Surplus/(Deficit) (13.4) Implied Additional Imports Requirements without Using
State Reserves
The alarming conclusion is that (1) China needs to purchase 13.4 million bales more than the USDA estimate, (2) China will have to use all its Strategic Reserves of cotton, or (3) Some combination of the first two will be used to resolve the cotton deficit. There are other conclusions that lack merit, such as that the USDA consumption estimate is grossly overestimated (I think it is too low already), beginning stocks are grossly underestimated, ending stocks are grossly overestimated. There are minor disagreements with all the estimates, but in reality the disagreements are minute.
Thus, China must either buy more or reduce its ending stocks, both point to higher prices. The March supply demand report can be viewed at http://www.usda.gov/oce/commodity/wasde/latest.pdf
The current pace of export shipments point to higher U.S. exports although USDA did not alter its export estimate. The weekly export report can be viewed at http://www.fas.usda.gov/export-sales/cottfax.htm
