NY futures edged up slightly this week, as December gained 75 points to close at 85.47 cents, while March advanced 72 points to close at 85.18 cents.
After a string of dull, low volume sessions, the market finally showed some signs of life today following several news stories out of India and China.
In India heavy rain apparently inundated parts of Gujarat and Maharashtra yesterday, although there are differing views among traders regarding the impact on cotton, ranging from problematic to beneficial. Nevertheless, recent rains in the US, China and now India are reminding traders that these generally late crops are still exposed to potentially harmful weather over the coming weeks.
At a China Cotton Association (CCA) meeting a number of speakers offered their opinion on ChinaΆs supply/demand situation this week, and while estimates varied greatly, the common theme was that planted acreage is lower than estimated and that yields are likely going to disappoint due to a variety of adverse weather conditions during the growing season. The Ministry of Agriculture came up with a crop estimate of just 29.0 million statistical bales, while the CCA was more optimistic at 31.8 million bales. However, both guesses are below the current USDA estimate of 33.0 million bales!
Interesting too was that the CCA sees ChinaΆs production gap this season at 7.2 million statistical bales (crop of 31.8 versus consumption of 39.0), whereas the USDA projects a shortfall of just 3.0 million bales (crop of 33.0 versus consumption of 36.0). We tend to agree with the CCA, as well as the US Ag attaché in Beijing, and feel that ChinaΆs mill use has been underestimated by some 3-4 million bales. As previously explained, inventories outside the Reserve seem to be a lot tighter than the USDA numbers imply and this can only be explained by higher consumption.
If our assumption were correct, it would be even more remarkable considering that China has been importing yarn and fabric at a torrid pace in recent months. In August, China imported a record 180Ά955 tons of cotton yarn, bringing the total for the first eight months of the calendar year to 1.18 million tons, or nearly 50% more than in 2012.
Another statistic from China that points to stronger mill use is the 2.94 million tons yarn production number, which includes all fibers. The cumulative figure for the first eight months of 2013 is over 8 percent ahead of last year at 22.6 million tons. Although there is no doubt that cotton continues to lose market share to man-made fibers, one nevertheless has to wonder whether cotton consumption has indeed dropped from 50.0 to just 36.0 million bales since 2006, while yarn output has doubled during that same period.
Last weekΆs US export sales of 87Ά400 running bales of Upland and Pima were labeled as ΅disappointingΆ by most commentators, although they seem to forget that old crop stocks are mostly gone and new crop is not available in any volume yet. Merchants are reluctant to commit high grades at this point due to the uncertainty regarding the quality of this crop and they certainly canΆt ship bales that donΆt exist. The fact that 18 different markets were buying US cotton last week shows that there is still widespread interest and we believe that sales will pick up once the crop is off the field.
One development that has the potential to affect financial markets is WashingtonΆs stalemate about raising the ΅debt ceilingΆ. Democrats and Republicans seem hopelessly deadlocked at this point and although we have seen these standoff theatrics before, only to be resolved in a last-minute deal, we get the impression that the situation is more serious this time around. According to the Treasury the US is about 3 weeks away from a ΅technical defaultΆ, which would wreak havoc in the markets, especially since Wall Street is currently quite nonchalant about it.
The President has already publicly stated that he wonΆt negotiate over raising the debt ceiling, while Republicans are adamant that they would only agree to it if there were some major concessions, such as a delay of “Obamacare”, the building of the Keystone pipeline and means testing for Medicare. With neither side willing to budge, the US is once again being pushed to the brink of a government shutdown and a first ever default on its obligations! LetΆs hope that sanity prevails, but be prepared for the unexpected!
So where do we go from here? Traders donΆt quite seem to know what to do with this market at the moment. On the one hand one could argue that there is plenty of cotton around the globe to put pressure on prices, but as long as China stands ready to import large quantities on price breaks, the downside seems to be rather limited. At the same time there isnΆt really any compelling reason for the market to run away to the upside either, unless adverse weather becomes an issue. Shorts will likely remain nervous until the bulk of the crops is in, but unless there are some major setbacks, the market is probably going to remain in a sideways trend.
Best Regards
