By O.A. Cleveland, Professor Emeritus, Mississippi State University
Cotton prices, weighed down by unexpected announcements from China, continued to trend lower and closed the week precariously resting at the 62 cents support level, basis the New York December contract. (The weekly settlement was actually 61.89 cents.)
Coupled with the surprise announcement by the Chinese government that imports of foreign produced cotton would be strictly limited to the required WTA agreement minimum – the government also announced it would support grower prices in the eastern provinces, the region where it has made repeated announcements that it wanted cotton planting moved out of the respective provinces.
Confusion still reigns supreme in the market as traders attempt to decipher the actual Chinese cotton policy. The New York ICE December contract lost some 4 percent of its value this week.
For example, on the heels of the above referenced policy announcements, the most recent dictates that cotton will not be sold from the strategic reserve for the coming 12 months, through October 2015. Thus, traders are left to wonder where additional cotton for spinning will come from. Most feel the government will actually allow additional imports.
Yet, it is all but certain that imports to China will have to rise above the WTA minimum. In the meantime, the market is left in confusion, and confusion is little more than excellent fodder for market bears. While the trading range remains intact (by the narrowest of margins), the nearby trend is negative and it is most dangerous to go against the trend. Thus, the previously suggested 57 cent support level may yet come into play.
The price relationship between New York futures and the world price (A-Index) remains well entrenched, and will continue to do so. Yet, there is no doubt that the Chinese contract has for now taken the world leadership as the price discovery market. Unfortunately, trading on that exchanged reached the panic stage this week as trading set daily and weekly volume levels. Again – as has been seen in all other markets – once panic sets in, the trading leadership becomes emotionally based rather than fundamental (supply and demand) based. Chinese futures settled in the 93-95 cent trading range on the week, a loss of about 5 cents.
To understand the panic trading and why it will persist from time to time (once it does calm down), one only has to recall that in recent times it was the Government that purchased directly from growers 90 percent of the countryΆs production and sold directly to the textile mill some 60 percent of its needs.
Now, just overnight, Government now says “Okay, Mr. Free Market, you take over and you manage price, supply, and mill demand. And by the way, we will micromanage things like exports, imports and we will be back to look over your shoulder.” Well as the U.S. learned in all of agriculture, not just cotton – during the 50s, 60s, 70s, and 80s – the free market does not function very well with the Government running the show, so will the Chinese. Too, in that China holds over half of the worldΆs cotton stocks, the world cotton market, the New York market, the Indian market and all others are caught up in this uncertainty which will only allow for more panic trading
In the meantime, the market will ATTEMPT to sort out the supply/demand events and trade best it can. Yet, the situation lends itself to potential volatile trading and that should be expected in New York pricing over the weeks to come. Basis levels will remain rather strong; however, quality cotton still easily attracts offers of 50 to 300 points on December to the grower, based on quality differentials. Certain qualities attract yet even stronger premiums.
Once the Chinese market can find some trading stability, other world markets will immediately find that stability. Nevertheless, changes in Chinese policy have affected the Indian marketplace, one of equal or even greater size, and this compounding could make current trading periods appear dull.
Yet, current prices are attracting U.S. export sales. The U.S. has already sold or delivered some 57 percent of the USDA forecast for the year. Weekly sales appear to have increased this week on the lower price activity.
