NY futures moved slightly lower this week, as December gave up 100 points to close at 84.74 cents, while March dropped 138 points to close at 83.58 cents.
Although price action has for the most part been constructive over the last couple of weeks, todayΆs USDA supply/demand report put a damper on bullish hopes, at least for the time being. Technically the overall picture hasnΆt changed much this week, as the market remains stuck in a five-month sideways trend with little momentum.
The USDA report didnΆt really contain any big surprises, but the fact that stocks outside China actually rose for a change seemed to rattle the bulls. After falling continuously in recent months, rest of the world (ROW) stocks increased by 0.65 million bales to 35.57 million bales, while the estimate for 2013/14 went up by 1.85 million bales to 35.41 million bales. In other words, the USDA now predicts both seasons to end with more or less the same amount of inventory.
The question is whether 35 million bales will be enough to put pressure on global prices? Over the last ten seasons, stocks in the ROW averaged 38.74 million bales, and five of these seasons ended with inventories between 39.7 and 42.7 million bales. By that comparison the 35.57 million bales at the end of this month and the 35.41 million bales at the end of the 2013/14-season look hardly depressing. Actually, they are the second and third lowest levels in the last ten seasons - only the 2009/10-season ended with fewer stocks at 32.4 million bales.
While ROW stocks donΆt look threatening, total global ending stocks of 94.34 million bales most certainly do! ThatΆs over ten months of global mill use and these USDA reports keep reminding traders of the potential impact such a massive inventory could have if it were dumped on the market. Fortunately the Chinese government has been willing to play gatekeeper, keeping its stockpile locked away for now, but the market seems to have a lot of apprehension in regards to an upcoming policy change, which is assumed to be bearish for prices. However, these fears may be overblown, since China is unlikely to completely shut its doors to cotton and yarn imports anytime soon.
When we look at the situation over the last three seasons, we had production surpluses in the ROW, which were all absorbed by Chinese imports. In addition to that China took about 5 million bales from ROW stockpiles. These imports have reached gigantic proportions over the last two seasons, after the price gap between China and the ROW had grown to over 50 cents/lb. According to USDA numbers, China imported 44.5 million bales over the last two seasons, an average of nearly 2 million bales a month.
It is quite obvious that this situation has to change, not only because China wonΆt indefinitely increase its already huge stockpile, but more importantly because the ROW no longer has the ability to supply China to such a degree. According to todayΆs USDA report, the ROW is estimated to produce a surplus of just 10.2 million bales next season and its ending stocks of around 35 million bales are already at the lower end of a ten-year range. In other words, there isnΆt enough cotton in the ROW to provide China with much more than 11-12 million bales next season.
The USDA estimate has China importing 11 million bales in 2013/14, or a little more than half of what China is taking in this season. At 11 million bales of Chinese imports, stocks in the ROW would remain unchanged at just over 35 million bales. Even if China were to import just 8 million bales, ROW stocks would still only rise to the 10-year average next season, hardly an overly bearish scenario. We donΆt foresee Chinese imports to be less than 8 million bales, because the Tariff Rate Quota (TRQ) alone will account for half of that amount and there will be some leftover quotas from the current 3-to-1-ratio scheme that will count against 2013/14.
China will no doubt be forced to overhaul its current policy, but we expect the changes to lead to a gradual reduction of its stockpile over several seasons and donΆt foresee any dumping of stocks at discount prices anytime soon.
So where do we go from here? The slightly more bearish USDA outlook doesnΆt change the fact that current crop inventories are extremely tight and we therefore donΆt expect any price pressure to develop until the cotton pipeline fills up again. With crops being later than normal this year it will probably take until early next year for that to happen. December should therefore stay relatively firm versus the rest of the board and we wouldnΆt be surprised to see the inversion to March becoming more pronounced over the coming months.
From a technical point of view the market is right in the middle of a 5-month sideways range, from which it seems to be difficult to escape anytime soon.
Best Regards
