Cotton dominated by Chinese imports

A significant part of the increase in the forecast for global ending stocks was a 3-million-bale jump in the estimate for Chinese ending stocks and a 1-million-bale drop in the estimate for Chinese domestic mill consumption. All of which means that although Chinese imports have increased dramatically, it doesn’t necessarily mean that actual usage is up. However, as one well regarded analyst pointed out, the cotton that China purchased is not mobile. It was acquired to bolster reserves, and it will either be used by mills or it will just sit there. Either way, it is not available for world trade. The burdensome inventory level portrayed in the official balance sheets are somewhat of misnomer.

The spurt of Chinese stockpiling will come to a halt eventually – when the central planners reach their goal. Looking past that day, we still find that the outlook is not quite that bearish. In planning for 2012-13 crops, we find that farmers are assuming that there will be little growth in overall consumption. The March 30 planting intentions report showed that US farmers will plant 13.155 million acres to cotton, below last year’s 14.73 million acres. It was still deemed a bearish report, because the figure was well above average guesstimates of 12.75 million acres.

We believe, however, that cotton area is subject to downward revisions. New-crop soybean prices have outperformed new-crop cotton prices by a wide margin, and it is clearly more profitable to plant soybeans. Wherever possible, the switch from cotton to soybeans will be made.

The world’s top two cotton producers, China and India, account for close to 50% of global output. Cotton area for the 2012-13 crop in both countries is expected to drop by 10% from 2011-12. If global demand swings back, the market will be extremely vulnerable. Anything less than perfect weather for the new crops will tighten the market.

We have exhausted the downside of this market. Cover short positions in December cotton and establish long positions. Place initial protective sell stops at 84.5¢ per pound, close only.