NY cotton futures under renewed pressure this week
New York cotton futures came under renewed pressure this week, as December dropped 304 points to close at 65.05 cents.
The market was unable to hold on to the impressive gains it posted last week and dropped right back to the middle of a 62.00-68.50 cents range, which has been in effect for about nine weeks now.
Nevertheless, December has so far managed to stay above a short-term uptrend line dating back to August 1, as well as a longer-term downtrend line that originated in early May.
“These two lines crossed just below 64.50 cents on Friday and as long December can stay clear of that level, the bulls have something to hang on to”, says the latest Plexus cotton market report.
Markets don’t like uncertainty and the cotton market has been shrouded in plenty of it lately, which is the reason for this meandering sideways trend for the last two months.
China’s government policy and unpredictable weather are keeping traders on their toes and either of them has the power to unsettle the market.
China finally confirmed what had been rumoured for a while, namely that Xinjiang producers would be receiving a target deficiency payment.
This amounts to the difference between the target price of 19,800 Yuan/ton and an average market price based on data collected between September and November.
At current rates the subsidy would probably exceed 6,000 Yuan/ton (44 cents/lb). Growers in the eastern cotton belt of China are less fortunate, since they will apparently only get a fixed subsidy of 2,000 Yuan/ton (15 cents/lb).
However, it is still not clear how China will proceed on cotton imports, which is the most important factor when it comes to international prices.
According to some sources, the government seems to be quite determined to slow down imports, allowing only the 1% TRQ and some processing quotas from here on.
Mills may even be required to earn their TRQ by buying Xinjiang cotton between now and December, possibly on a ratio scheme.
“This sounds like a clever way to support cash prices and thereby lessen the government’s subsidy burden”, the report says.
The market now fears that Chinese imports may not quite live up to the USDA estimate of 8.0 million bales for the current season, which in turn would lead to higher ROW stocks and depress prices even more.
However, this view may be too pessimistic, since there are still quite a few open quotas around from earlier this year, when mills decided to wait for lower prices.
Between these unused quotas, next year’s TRQ and some additional processing quotas, one may still see imports climb to 8.0 million bales by next July.
Beyond that the pace of Chinese imports may indeed slow down, but the ROW surplus is likely to drop as well since these lower prices should discourage production and stimulate mill use.