Saturday, December 14, 2013
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Cleveland On Cotton: Chinese Mills Know What They Want

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The December supply demand report and the weekly export sales report were both void of any surprises this week, but prices still moved higher. The March contract closed above 83 cents and is approaching the 84-85 cent mark suggested last week as a probable point where price resistance will be too stiff to penetrate.

This idea was supported by the export sales report as well as the technical factor, open interest. Certificated stocks still need to rise as they have now fallen below 60,000 bales with concerns that more decertification is coming.

Either way, that amount is not enough. So, the market must find a way to bring more to the Board. Hopefully, this week’s move above 83 cents will do that. Nevertheless, I continue to look for the current rally to exhaust itself near the current level.

Both world and U.S. supply-demand estimates were little changed from the November report. While totals remained much the same, some of the country by country estimates did change. Principally, the Chinese crop was lowered another 500,000 bales, down to 32 million bales, and in line with Chinese announcements. USDA did, as it somehow seems to do, increase world carryover a bit.

Weekly U.S. export sales slowed somewhat, ending a seven-week run of above 200,000 RB of weekly sales. The slowing was not unexpected as the reporting period corresponded with price activity near or above 79 cents in the March contract–after a period of 77-78 cent prices.

As stated, the price advance to 83 cents will likely continue to limit sales.  Still, net sales of Upland on the week were 174,100 RB and Pima sales were 3,300 RB. To date, total U.S. sales of all cotton have climbed to 7.03 million bales.

Chinese mills continue to shy away from sales from the national reserve, with the exception of good quality cotton from Xinjiang and government-owned imported cotton. That is, the quality crisis continues and, as of yet, has not come home to roost.

The limited availability of good quality in the Chinese reserve continues to strain textile mills by limiting the volume of quality yarns they can produce. Thus, the upstream mills continue to purchase imported yarn from around the world, including the U.S. at month-on-month and year- on-year record levels.

Imported cotton yarn does not carry the stiff penalty that is associated with imported raw cotton. So, world demand remains strong, despite the lower level of yarn production coming from China.

This quality problem will linger and keep a floor under prices. Nevertheless, at least a measurable proportion of the current rally has been associated with short covering by funds and not with any increase in open interest.

This is another reason to suggest that the 84-85 cent level in the old crop March is top heavy. You may want to consider purchasing puts to cover a portion of new crop production, but that discussion will wait for another time.

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