NY cotton futures deflate after wild ride of Mar 26

11 Apr '14

5 min read

China announced some details regarding its price support policy for the 2014/15-season, whereby growers in Xinjiang will receive a target price of 19’800 yuan/ton, consisting of the market price for cotton plus a ‘target deficiency payment’ by the government.

Details of this subsidy scheme are still pending, but it is believed that WTO rules limit the amount the government is allowed to spend under such a subsidy scheme to somewhere in the vicinity of 3’000 to 3’500 yuan/ton, based on an expected crop size of around 20 million bales in Xinjiang next season.

Assuming that Xinjiang cotton is going to be marketed somewhere between 16’000 to 16’500 yuan/ton next season – Chinese futures for January’15 delivery are currently trading at 16’100 yuan/ton – it would imply that import prices for high grade cotton cannot exceed 98-100 cents/lb C&F under the sliding scale duty scheme and a few cents more under the 1% TRQ. Calculating it back to a NY futures equivalent, we arrive at prices in the high 80s.

In other words, this new support policy is likely to lower the Chinese price ceiling considerably compared to previous years and it will also narrow the gap between Chinese and international prices, which could impact the competitiveness of cotton and yarn imports going forward.

Wednesday’s USDA report contained no major surprises, as the US crop was lowered to 12.9 million bales as expected, which means that US ending stock are now projected at just 2.5 million bales, the lowest in 23 years. Chinese imports increased by a million bales to 12.0 million bales, which leads to a further tightening of ROW ending stocks to 38.1 million bales. That’s nothing out of the ordinary though, since ROW stocks have fluctuated between 32.8 and 42.2 million bales over the last ten seasons.

US export sales of 109’600 running bales for both marketing years combined seemed to disappoint the market this morning. However, considering that there are only about 1.5 million bales left for sale according to our calculation, the light sales number may have more to do with limited supplies than with a lack of buyers.

There were again some cancellations, but most of them seemed to consist of rollovers to next marketing years. Shipments were once again excellent at 311’700 running bales and at this pace it would take only seven more weeks to get the remaining commitments exported.

Analysts need to adjust their expectations in regards to export sales and shipments, because neither is going to produce big numbers in the months ahead considering how little remains left to be sold and shipped!

Plexus Cotton Limited

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