Typically mills hold stocks of 30-40 days, but in anticipation of an empty pipeline they may have increased their stock levels somewhat. So let's figure they hold 50 days of consumption or around 1.3 million tons. If we add it all up, we arrive at 3.16 million tons, which compares to the current USDA estimate for Chinese ending stocks of 4.46 million tons.
This is quite a significant difference and it would explain why the Chinese market has felt so bullish in recent months. We realize that it is nearly impossible to get accurate figures out of China, but from a "where there is smoke, there is fire" approach we have to conclude that Chinese stocks are not anywhere near the official figures.
So where do we go from here? We believe the market will be very well supported over the next two or three months, after that we need to evaluate how the crops are turning out and how consumption looks going forward. The market currently has support from both a fundamental and a technical point of view.
The pipeline is not just empty but is several million bales short and it won't fill up again until the bulk of the crop is moving in. The chart looks constructive as well and money flows into commodities are positive after the return of hedge funds on the buy side. Outside markets are supportive, as grain markets are rallying after Russia has banned wheat exports after August 15 and the US dollar has been losing further ground this week.
December will derive its value from the cash market, not vice versa, and in order to attract certified stock it needs to rally to a level at which it exceeds prices paid in the export market. We are barely at this point and it probably takes several more cents in order to draw cotton away from a starved cash market.
The inversion between December and March may remain until certified stock is increasing again, which we don't expect to happen before some time in late October/early November. And even if certified stock were to grow there is no guarantee that the inversion will vanish.
Once the crop is in we need to see whether the supply/demand outlook justifies a weakening of prices. Even if March or May were to feel some crop pressure, there are 7.7 million bales of unfixed on-call sales providing support and there is also the Chinese government waiting for opportunities to refill its depleted Reserve stocks.
Due to the return of hedge funds as buyers we are expanding our expected trading range to 77-84 cents for December, with an outside chance for prices to go even higher if any of the major crops were to encounter a setback.
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.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "UBM China (Shanghai)")
-Ltd..jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "Thermore (Far East) Ltd.")
