NY futures continued to slide this week, as December dropped another 94 points to close at 82.30 cents, while March gave up 42 points to close at 81.89 cents.
The futures market cooled off further this week, as speculators and the trade continued to reduce their respective positions in the December contract. The spot month has now lost over 46Ά000 contracts in open interest since it peaked at 170Ά893 on August 19. Meanwhile, volume has dropped to rather anemic levels over the past couple of days, with just 11Ά012 lots trading on Wednesday, while todayΆs volume was estimated at 15Ά057 contracts.
The latest CFTC report showed speculators at 6.3 million bales net long as of August 27, down 30% from the week before. However, this speculative net long position is still relatively large compared to a year ago, when it amounted to only 1.8 million bales. In other words, there could still be a lot of spec selling ahead of us if additional sell signals get triggered. The market is approaching important 7-month support on the daily and weekly chart at 81.72 and 79.30 cents, respectively, and a breach of these levels would prompt additional waves of selling.
This week the Ag attaché in Beijing published a report that is at odds with the USDA supply/demand numbers for China. For the 2013/14-season the post in Beijing has beginning stocks at 48.0 million statistical bales (USDA 50.3 million), production at 32.15 million bales (USDA 33.0 million) and mill use at 40.0 million bales (USDA 36.0 million). This adds up to ending stocks of just 50.2 million at the end this season, or 8.0 million bales less than the current USDA estimate!
To us the attaché stock number seems more realistic than that of the USDA, for the following reason. With Chinese Reserve stocks at 7.4 million tons or 34 million bales at the beginning of this marketing year - a figure that is widely accepted by analysts - the current USDA beginning stocks number of 50.3 million bales implies that there were 16.3 million bales of ΅other stocksΆ in the hands of mills, domestic traders or bonded warehouses. This would equate to nearly five-and-a-half months of domestic mill use, which is hard to believe. Why would Chinese mills have been in such a hurry to buy reserve cotton before auction sales expired at the end of July if there was already that much cotton in the system?
The two estimates differ mainly in regards to mill use, with the attaché being a lot more optimistic at 40 million bales for the current season. The post in Beijing has also slightly lower crop and import numbers, with imports for 2013/14 estimated at 10.1 million bales, or 0.9 million bales less than the USDA. If anything these differences show how difficult it is to get a good grip on Chinese numbers, but it also serves as a reminder that we should not get too bogged down by statistics and instead focus on what we witness in the marketplace.
The attaché report made also reference to the strong pace of yarn imports, which for the first six months of 2013 amounted to 888Ά000 tons, up 47% over the same period in 2012. Recent reports from India and Pakistan indicate that these two countries alone currently export over 160Ά000 tons of yarn to China every month, a truly staggering amount! Based on the current trend it is possible that Chinese yarn imports could exceed 9 million bale equivalents this season. There is no denying that analysts have underestimated China in regards to cotton and yarn imports over the last couple of years, and who knows, maybe China will surprise us again this season. As stated before, cotton imports of around 10 million bales coupled with strong yarn imports would be enough to keep ROW stocks from rising!
So where do we go from here? In the short term, the path of least resistance seems to be down! Speculators continue to get out of longs and the trade fears that a record Indian crop is going to put pressure on export prices of other growths, including the US. In the physical market we still have a relatively tight supply situation at the moment, which supports prices for nearby deliveries. But beyond that we can already see some heavy discounting for shipment December onwards, particularly from India, and this inversion in the cash market should eventually translate into pressure on the futures market. Also, from a technical point of view we need to keep a close eye on the 81.72 cents support level, which if broken could turn things ugly in a hurry for the bulls!
Best Regards
