Dec gave up 67 points on the week while trading a very subdued 182 point range that leaves a pesky 5 point gap (77.95 – 78.00) above the current market. Technical traders will watch this gap as a lingering sign of DecΆs potential to break sharply lower.
Total export commitments against the current MY are now in excess of 10.93M bales and shipments, while significantly lower W/W, still exceeded the weekly pace required to meet the USDAΆs target of 10.5M bales. We still expect final exports for 2013/14 to exceed 10.7M bales.
While this data is positive, there is a darker side emerging for the MY that begins Aug 1. World trade is expected to contract some 8M bales Y/Y, all of it attributable to China (per the USDA). China, thus far, has accounted for approximately 19% of total US export commitments since Aug 1, but Turkey, Pakistan and Mexico, combined, have accounted for nearly as much. Each of these nations produces cotton and their combined production is expected to increase 726K bales in 2014/15 against an expected increase of only 350K bales in aggregate consumption.
Turkey, the largest importer of US cotton in this group is expected to have a 500K bale production increase and only a 100K bale consumption increase. The cotton crop in Pakistan is reportedly off to a more than acceptable start, and if sufficient rainfall occurs throughout the growing season, production may exceed itΆs currently projected 9.5M bales. Their consumption likely has less upside potential, a recently conferred preferred trade status with the EU notwithstanding. Recent rain over cotton-producing regions of Mexico is not diminishing production prospects in that part of the world, either.
We think that there will be little extra import activity from China beyond what is currently projected. China has opted to directly subsidize producers (and production entities) in Xinjiang, the region that typically produces the nationΆs highest quality fiber. Machine harvesting of cotton in this region has increased over recent years and potential exists for it to increase much more rapidly, if need be. This direct subsidization at the production level should allow mills in China to source quality domestic cotton at prices more amenable to the maintenance of viable profit margins.
Further, in an effort to drawdown its massive stockpile, China has divided reserve stocks into “imported reserve”, “Xinjiang domestic reserve” and “other” categories. Incentives exist to more reasonably acquire stocks from the former two categories when mills purchase stocks from the latter.
Of course, this parsing also serves as a reminder that there are questions in some circles as to just how much of the reserve has desirable spinning properties, given its age.
On Dec 13, China raised the benchmark for its sliding scale quota, but if production in China comes close to the USDAΆs current target no such quota may be issued. China is currently expected to produce 29.5M bales of cotton, consume 37M bales and carry forward in excess of 60M bales (includes accounting for reserve stocks and 4M bales of WTO mandatory import stocks).
Although we expect acreage to decrease to a projected 10.7M bales on the upcoming USDA acreage report, our production projection is now at 15.65M bales (with plenty of upside potential if rains keep falling over West Texas).
On the positive side, new crop beginning stocks are likely to grow tighter, and potential exists for large sales to be put forth in next weekΆs cotton export report. Too, on-call sales commitments increased 7% W/W against contract months in the 2014/15 MY.
However, speculators seem unwilling to sponsor a major rally at this time, cutting their aggregate net long futures only position 24% W/W to only 22K contracts as of June 17. Their implied long option position is currently at approximately 7Kcontracts, up from nearly flat as of June 10, and seems to convey that they are waiting for clarity on S&D to begin to move the market before they enter in any large manner.
For next week, we expect the market to settle near unchanged to lower, supported somewhat, perhaps, by expectations regarding the USDA weekly export and June 30 planted acreage reports. But, make no mistake, this market can certainly move lower. We expect Dec to trade a range of 75.25 – 78.00 on the inside or 74.50 – 79.80 on the outside.
