While this support price greatly benefits farmers, it is detrimental to textile companies that export their products. Last season China solved the problem by letting cheap imports of cotton and yarn in, but this approach has its limits for obvious reasons. The decision to let reserve stocks go at a loss may signal a policy shift for the current season, a change that is potentially bearish for international prices.
China has an estimated production deficit of just 8 million bales this season and if this shortfall is at least partially filled with reserve stocks rather than imports, it would leave a lot of cotton looking for a home, particularly in the US.
While we see near term fundamentals as bearish, the market continues to find support from strong grain and soybean prices as well as speculative buying. Money managers continue to like the commodity complex and have increased their long positions in futures and options to their highest level in 15 months.
Since early June the GSCI spot index, which measures 24 commodities, has rallied by over 20 percent, partly because of the drought and partly because of the Fed’s easy money policy, which gives money managers the confidence to approach asset markets from the long side. However, since the economy is still without a proper growth engine, it depends on further stimulus to keep it going.