Of course the big change in stocks occurred in China, where we are looking at an increase of 20.2 million bales over the same period. But here is the interesting thing to remember when it comes to pricing - stocks outside China are priced at around 85 cents (A-index), while China’s inventory carries a much higher price tag of over 140 cents/lb.
It is therefore unlikely that China is going to pressure the world market with its high priced inventory anytime soon. What may happen instead is that China will use its buffer stock to facilitate a gradual shift away from cotton towards food acres. In other words, when these large Chinese stocks are viewed in the context of a dynamic balance sheet, they suddenly become a lot less threatening.
So where do we go from here? The dynamics in grains and soybeans are likely going to propel prices even higher. With Index Funds occupying a large percentage of the longs, with speculators jumping on the long side and with the trade caught short, we could see some silly prices in corn and soybeans before it's all over.
With Nov’13 corn at 6 dollars/bushel and Nov’13 soybeans at 13 dollars/bushel, cotton at current prices will lose out in the fight for acreage next season. Unless food prices drop considerably, which doesn’t seem likely given the current fundamentals, cotton will have to trade higher sooner or later, either by being pro-active in defense of its acreage or by being reactive after having lost a sizeable chunk of its acreage. We suspect it will be the latter!
Plexus Cotton Limited