However, the December contract, which still carries some weight even though its open interest has dropped to just 30’000 contracts, did not confirm the breakdown and stayed clear of its recent low of 75.27 cents.
This week’s divergence between December and March seems to reflect what we have been observing in the physical market, where pipeline stocks are just starting to fill up again, keeping nearby prices relatively well supported, while offering rates for first quarter shipments are being discounted in anticipation of some supply pressure down the road.
Demand has been brisk over the past ten days, as numerous large sales of US, Australian, West African and Brazilian cotton have been reported, with China actively participating. This is encouraging, because traders have been writing China off as a strong importer, which has been one of the key factors behind the market’s weakness. However, as we have learned from past seasons, we need to be careful not to underestimate Chinese imports!
For the first three months of the marketing year, China has already imported 2.83 million statistical bales and we expect strong shipments in November and December to bring this number up to around 5.0 to 5.5 million bales.
Beyond that we can almost certainly add the 4.1 million bales of TRQ imports to the tally in 2014 and mills are also counting on a certain amount of processing trade quotas to be released next year. In other words, it is no big stretch to project Chinese imports at over 10 million bales this season and if prices were to fall another three or four cents, this number would grow considerably with the 40% tariff buyers stepping in.
Last Friday’s USDA supply/demand report turned out to be less bearish than anticipated, despite the projected increase in global ending stocks from 94.7 to 95.7 million bales. The numbers that we pay the most attention to are the seasonal production surplus outside China (11.1 million bales) and Chinese imports (11.0 million bales).
As you can see, the USDA still believes that Chinese imports will be able to absorb the production surplus in the ROW, thereby keeping stocks outside China from rising. If true, one could argue that prices shouldn’t stray too far from where they were trading this summer, which was about ten percent higher than current levels.
However, we feel that the USDA is at least half a million bales shy on the US crop and there is also room for the Indian number to grow by 0.5 to 0.75 million bales. At the same time Indian mill use may be overstated by half a million bales or more, given the recent slowdown of Chinese yarn imports. In other words, we believe that the ROW production surplus is going to be quite a bit higher than 11.1 million, possibly as high as 13.0 million bales. ROW stocks may therefore increase after all, which is probably the reason why the market has been on the defensive lately.
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