Cotton prices will get cheaper again!
The market continued to move sideways to higher, depending on which month we are looking at. While December closed within its narrow 66.42 to 69.05 cents range for the 27th consecutive session, the widening spread has allowed March to display a steady uptrend over the last couple of weeks, settling today at its highest level since October 2008.
The liquidation of the December contract continued in an orderly and speedy fashion, as only 12'444 contracts remained open before today's session. Total open interest finally declined by about 25'000 contracts from its recent high of 194'000 contracts, but it has still held up considerably well during this liquidation period as speculators maintained a keen interest in cotton. March OI has already risen to 119'207 contracts, which is just slightly below the highest level we saw in the December contract (120'380 lots).
With March now assuming the spot month position at 73.00 cents, it may take a while for the market to digest this extra 400-point jump in the futures price. In just seven weeks, since October 2nd, the spot month has advanced by no less than 1200 points, which is difficult to swallow for most mills. However, a lot has happened during these seven weeks, as the US and Chinese crops have suffered weather related setbacks and the trend of outside markets has acted in support of higher cotton prices (weak US dollar, strong stocks and commodities).
While the quality issues of the US crop are already well known by the market, we have just received the first snapshot of the Chinese crop. According to the China Fiber Inspection Bureau, only 79% of the 2.8 million bales classed so far were of Grade 3 or better (versus 95% last season), with 81% measuring 28 mm or longer (also 95% last year). Only 54% had mike readings between 4.3 and 4.9, compared to 77% a year ago. Although the statistical sample is still small, it seems to confirm that we are dealing with a below average crop in China this season, both in terms of size and quality.
The Chinese domestic market has been reflecting these concerns for quite some time and the March contracts on the CNCE and ZCE exchange are currently trading above one dollar. The Chinese government has announced another auction for 500'000 metric tons to keep the local market under control, digging deeper and deeper into its stockpile. This on-going depletion of Chinese stocks creates a lot of future support, as the Chinese government will probably want to refill its strategic reserve once international prices become more attractive again.
Although the press in the US and Europe is full of stories about an overheating Chinese economy, the Chinese leadership is seemingly willing to throw more fuel on the fire. Last week China's President Hu Jintao told Asia-Pacific business leaders that China would take 'vigorous' steps to boost household spending and thereby reduce its reliance on investment and exports for economic growth.He was quoted as saying 'our focus in countering the crisis is to expand domestic demand, especially consumer demand. We want to increase people's ability to spend'.