The USDA supply/demand report, which was released last Friday, certainly did not disappoint the bearish camp in that regard, as it boosted global ending stocks to an unprecedented 81.72 million bales, or nearly 77% of current mill use. However, despite a kneejerk reaction that forced the spot month temporarily below 75 cents following the release of the report, the price action has since been bullish. So what is the reason behind this strength?
The answer would be quite obvious to traders if they had two separate USDA supply/demand reports to look at – one for China and one for the rest of the world (ROW). What they would see is a rather depressing, very bearish situation in China, while the balance sheet for the ROW looks quite friendly. For example, while the stocks-to-use ratio in China is at a ridiculous 114%, it is at just 58% in the ROW. In fact, the stocks-to-use ratio in the rest of world is only the 3rd highest over the last five seasons. Furthermore, while Chinese mill use has fallen by 14.5 million to just 35.5 million bales since 2009/10, the ROW is actually enjoying the highest mill consumption in five years at 70.6 million bales.
In other words, when we talk about the “cotton market”, we really need to talk about two markets, namely China and the ROW. The Chinese cotton market is clearly bearish, with Chinese prices nearly double of what they are in the ROW. For example, the March futures contract in New York of around 78 cents/lb compares to a March futures contract in Zhengzhou of around 144 cents/lb. Since prices in the ROW are relatively cheap, they continue to attract a lot of buying interest, including import demand from China.
The latest US export sales report once again surprised positively, as no less than 372’400 running bales of Upland and Pima cotton were sold to 19 different markets last week, bringing the total for the current marketing year to 10.0 million statistical bales, of which 4.1 million bales have so far been exported. According to our calculation, there are only around 6.5 million bales of US Upland cotton left for sale at this point, assuming that US domestic mills have already booked their requirements for the season. In other words, if US export sales were to average around 225’000 running bales a week through the end of July, every last bale of US cotton would be committed!
Chinese imports maintained an impressive pace during December at 2.4 million statistical bales, with Indian, Australian and US cotton leading the pack. For the first five months of the marketing year (Aug-Dec), China has already taken in 7.7 million bales of foreign cotton, which means that for the remaining seven months it only needs to import another 4.8 million bales to get to the current USDA estimate of 12.5 million bales.
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