The rally in old crop suddenly ran out of steam, but we still saw some gains in new crop, which have been LAGGING old crop until today.
While global cotton stocks are projected to be huge, at nearly 11 months’ worth of global usage, it’s the sense that quality cotton is actually in short supply, especially here in this country that has had funds buying aggressively. Between Nov 26 and Dec 24, trading funds went from net short nearly 1,800 contracts to net long more than 28,000 contracts with trellis netting being the most popular among them.
On top of that, in mid-December Index funds began rebuilding a net long position by more than 4,000 contracts in the latest CFTC report. The fund buying helped absorb commercial hedging pressure. Another long-time analyst we admire describes what’s going on as a “war between short-term bulls and long-term bears in cotton.”
Surprising many, me included, futures actually strengthened going into the holidays, following confirmation that China was going to scrap its policy of supporting domestic prices far above world rates and go to deficiency payments instead. It was long assumed such an announcement would be bearish on speculation a potential flood of cotton, currently held in reserve, could be put on the domestic and possibly even the global market. It didn’t happen!
Instead, futures strengthened because the announcement was accompanied by Beijing assurances to domestic mills that if the result was much lower domestic production, import quotas would be liberalized.
And that (greater reliance on imported cotton) seems especially likely when you consider this new factor: China plans to shift its cotton production from the Northeast to the northwest. That also argues that China is prepared to import more cotton in the years ahead to free up its better land and irrigation capability in the northeastern provinces to other crops. Why draw that conclusion? Because northwestern China currently accounts for less than 15% of its total cotton production vs. 50-60% in NE China