The cotton market found upward momentum at weekΆs end buoyed by the exceptionally strong pace of U.S. export sales, mounting concern regarding the quality of the Chinese crop and the impending announcement by the Chinese government of its decision as to when and for how much it will offer cotton to its domestic textile mills. Imbedded in this is the fact that U.S. cotton can be landed at the Chinese mill door for less than landing Chinese cotton at the mill. Too, domestic Chinese mills are sheltering themselves from locally produced cotton due to an alarming decline in the production of high quality grades both in the Reserve and in the makeup of the 2013 crop. With the March contract becoming the spot month, the 75 cent support level seems to be firmly in place as the market continues to scratch, claw and persistently force its way back to the 79-81 cent level.
Net sales of U.S. exports for the week ending 11/7/2013 totaled over half a million bales as Upland sales accounted for 472,700 RBs and Pima sales totaled 32,500 RBs. China, Turkey and Vietnam accounted for some 370,000 RBs of the sales. Too, the widespread demand continues to suggest that USDA will increase its estimate of export sales. The prior four weeks witnessed some 1.6 million bales of export sales. Additionally, as noted in prior weeks, sales to China–due in part to price and quality variables were somewhat unexpected. Sales slowed somewhat this week as demand is for immediate delivery can no longer be met and the late U.S. harvest limits such sales.
Rumors surrounding the policy intentions of the Chinese government are across the board. Generally such announcements come without warning, but it seems clear that ΅something” is in the works. The near 60 million bales the government has in storage carries a very expensive price tag, in excess of 33 billion dollars (yes, Billion). Thus, the purchase of cotton at current prices would make for a considerable reduction in the average cost of Reserve cotton.
Look for purchases of U.S. cotton to continue (again, it is less expensive than domestic Chinese cotton) as the Chinese attempt to lower their average inventory cost. Further, the world marketplace awaits the announcement as to when the Chinese Reserve will renew its practice of selling cotton to domestic Chinese mills. That announcement is also expected immediately. Nevertheless, it is believed that it will essentially involve only 2011 crop cotton. The current crop is expected to be withheld from the market for now.
Any price rally will face considerable difficulty climbing above 81 cents. Thus, one should expect the current price consolidation to continue with the market working between 76 and 79 cents.
