Rose On Cotton: China Could Have A Hard Time Reducing Its Stockpile
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World carryout, per the WASDE report, for 2013/14 came in at 96.41M statistical bales vs the 95M expectation while world carryout outside of China rose 1.2M (53% S/U ratio) to 39.1M. This does not constitute a tight S&D, although the southern hemisphere crop projections can practically be applied to 2014/15.
US production was reported about 200K bales shy of expectations (about 100K north of ours), but carryout was unchanged at 3.0M by virtue of an unchanged 10.4M bale export projection. Hence, the report was, in effect, neutral to bearish, yet the following day, the market reacted in a bullish manner.
A portion of the trade’s discounting of the report was, most likely, the expectation of another strong export report on Thu, Dec 12. And the report was strong (179K RBs for all cotton). Although less than the 4-week rolling average, it far exceeded the needed pace to meet the 10.4M export projection.
Export shipments for the sales period, at just shy of 200K RBs, supported the market, as well. Continued decreases in certificated stocks also allowed the WASDE report to be discounted.
The current rally is largely speculative, we think, as the out months have failed to keep pace with Mar, but it has been beneficial to producers who rolled their on-call commitments forward. However, speculative rallies, with little nearby demand or fixation potential, can evaporate very quickly. We suspect nearby business has faded dramatically as price has increased, and selling pressure from producers that rolled their on-call commitments will also provide selling pressure.
Looking forward to next week, the weekly technical analysis is positive; however, fundamental problems exist.
The tightness of nearby US stocks may be alleviated in the short-term as cotton is classed and delivered to merchants. In China, the CNCRC reserve release off-take, while much higher than last year’s levels, is still less than robust.
And, China has raised its benchmark for sliding scale quota imports to approximately $1.12/lb for 2014 and imports will be taxed at an increasing rate as import prices deviate further southward from the $1.12 mark.
While the extent of the bearishness of this announcement could be mitigated by subsequent announcements from CNCRC regarding gross levels of import quota to be issued for 2014, the adjustment relays that China wants to draw down its reserve stockpile and that it anticipates expected lower prices in 2014 will hamper its efforts to do so.
Next week’s export report will most likely feature fewer net sales that last weeks, although we expect it to exceed the 99K RB/week pace required to meet the current projection as a weaker US dollar and stronger Indian rupee partially offset higher futures and average world prices. Shipments could increase significantly, which could be viewed as supportive.
Eventually, increasing world stocks outside of China will wear on the market, as well.
Looking further out, Rabobank has said that it expects the cotton price to average near 73.00 for Q4 of 2014 as world production increases to near 120M statistical bales on the stabilization of supplies of competing crops. We have no problem with their Q4 projection, but we think that US ending stocks will tighten via increased exports and, perhaps, reduced production.
Our most recent analysis suggests a total US crop of 13.0M. And, a smaller US carryout will accentuate the inevitable competition for acres as planting season approaches. We think that Dec 14 can trade in the mid-80s prior to planting, with the remainder of the season left to the weather market and a cumbersome world S&D.
For the coming week, Mar 14 could trade as high as 85.00 – 86.00, especially for intraday highs, but its staying power at that level is most likely limited. We expect a lower settlement on the week as the market searches for physical support while trading a range of 80.00 – 84.00 (inside) or 78.50 – 85.45 (outside).
Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com.