Dismantling the Chinese cotton monster

There is an ongoing uncertainty regarding the future of Chinese imports. As we discussed in our most recent article on cotton, Chinese carryover stocks have ballooned to over 58 million bales. That’s up from 50 million bales in 2012-13 and dramatically higher than 31 million bales in 2011-12.

The Chinese government is reportedly in the process of overhauling its stockpiling policies, which effectively made it cheaper for cotton users to import rather than buy domestically grown cotton. The USDA estimates that Chinese imports from all sources will fall by close to 50% from 2012-13, although some analysts see continued robust Chinese imports for the foreseeable future. Hard evidence suggests that Chinese imports have already slowed down materially. For the new 2013-14 marketing year, which began Aug. 1, total Chinese purchases from the U.S., including shipped and unshipped, total 488,000 bales. In the comparable period last year, 1.821 million bales were sold to China.

The forecast for global ending stocks was revised in August to 93.77 million bales, or 85.36% of usage, down slightly from the July estimate of 85.9%. Lower production estimates for the U.S. and China were partially offset by an increase in the estimate for carry-in stocks from the 2012-13 marketing year. But with the magnitude of the overhang we’re looking at, the downward revision in ending stocks is largely meaningless.

If China were to start chipping away at its stockpile, the market would collapse. The rally that stopped us out of our short position was the result of an unwarranted focus on the U.S. crop. We do not believe these price levels are sustainable. Cotton is a particularly volatile market. Look to reestablish conservative short

positions in December cotton on rallies. Place initial stops at 90¢ per pound, close only. Risk averse accounts, not prepared to risk such large losses, should avoid the trade.

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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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