Chinese cotton inventories may usher in the bear

The Indian monsoon has been above average. The USDA raised its estimate for Indian production by 1 million bales from its June estimate, to 28 million bales, or 5.6% higher than last year. The upward revision was possibly a reflection of the successful passing of the critical on-time arrival of the monsoon. The Chinese crop is down 1 million bales from last year, or 2.8%, but that is not very likely to result in increased imports — as explained below. A U.S. crop failure — while, still a possibility — may not mean what it once did.

As with many commodities, Chinese import trends are the key. China’s cotton stocks have ballooned to 59 million bales — having grown from only 10 million bales in 2010-11. The government is rumored to be poised to sell off inventories, and imports are expected to decline. In 2011-12, 54% of U.S. exports went to China, compared with only 42% for the current marketing year.

Chinese imports from all sources peaked in 2011-12 at 24.5 million bales. In 2012-13 that figure fell to 20 million bales, and for the coming season, imports are expected to plummet to only 11 million bales. If China were to unleash its stocks, it would take a full season or perhaps two to see it return as a steady and reliable purchaser.

The flip side is that we do not actually know how large the stockpile is. The only solid information is the study of China’s importing patterns. But as such, we may indeed be at the beginning of a period of greatly reduced Chinese imports.

U.S. shipments for the outgoing 2012-13 marketing year have tapered off over the past four weeks, averaging only 160,000 bales. The July crop report cut the export estimate by 300,000 bales, to 13.3 million bales. But with only three weeks left to the marketing year, exporters would have to ship just under 300,000 bales per week to reach the USDA target, which is unlikely to occur. The USDA will have to cut its estimate again, which will increase the already-exhausting estimates for ending stocks.

We were stopped out of long position at 82.5¢ per pound, basis December, as per our May 8 recommendation. Massive global stockpiles will eventually find their way to the market and will depress prices. Establish short positions in December cotton. Place initial stops at 88¢, basis December, close only.

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About the Author
Sholom Sanik is an analyst with Friedberg Mercantile Group Ltd. He can be reached at ssanik@friedberg.ca
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