On Tuesday the market was able to break above a triangle formation dating back to late August, which prompted some new spec buying and forced additional shorts to cover. The increase in volume and the jump in open interest of around 3’700 contracts over the last two sessions give the move some validity, but there is still plenty of trade selling to chew through before the market has a chance to break out of its long-term sideways trend.
US export sales continued to impress, as another 299’500 running bales of Upland and Pima cotton were sold for the current marketing year last week, along with 26’000 bales for next season. Once again we had broad-based participation, with no less than 17 markets on the buyers list. Over the last five weeks sales have amounted to 2.0 million statistical bales for the current marketing year and 0.3 million bales for 2013/14, bringing total commitments to 8.5 million and 0.5 million statistical bales, respectively.
The latest USDA report was seen as mildly supportive, because the US balance sheet tightened somewhat due to a smaller crop and higher exports, while global stocks outside China saw a reduction of 1.2 million to 42.0 million bales. This reduction was mainly the result of a smaller US crop, a revision in Turkish beginning stocks going back several seasons and an increase in Chinese imports.
Although stocks outside China are still projected to be 3.0 million bales larger than last season and 3.7 million bales more than they were in 2010/11, they are by no means at depressing levels, especially when we consider a potentially large drop in plantings next spring. As we have mentioned before, when we talk about the global stock situation, we need to factor the price of these stocks into the equation. While international cotton carries a price tag of 80 to 90 cents landed Far East, Chinese cotton as measured by the CC-index is still around 50 cents more expensive.
In other words, there is plenty of room for international prices to improve before they bump into the massive ceiling of Chinese Reserve stocks. Unless China shuts all its doors to imports, be it in the form of raw cotton, yarn or grey cloth, the balance sheet in the rest of the world is likely to tighten quite considerably next season, which is definitely not bearish to prices.
Over the last five seasons China has absorbed more or less all the seasonal surplus that the rest of the world has produced. According to USDA numbers, the ROW produced a combined 64.2 million bales in surplus cotton between 2008/09 and 2012/13, whereas Chinese imports are pegged at a cumulative 65.9 million during these same five seasons.
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