Dismantling the Chinese cotton monster

Turning bearish on the cotton market back in July after a long stint of bullishness gave us a severe case of whipsaw. December cotton (NYBOT:CTZ13) sailed right through our 88¢-per pound buy stop, on its way to 93¢. Within a few days of the peak, prices plunged, on their way back to 82¢.

During the planting-decision season, there was little incentive for farmers to plant a large cotton crop. Global inventories were burdensome, to say the least, and soybean planting was a more profitable alternative. The most recent estimate for U.S. cotton acreage was 10.2 million acres, down from 12.31 million acres in 2012-13 and 14.74 million acres in 2011-12. The smaller crop seemed adequate to meet both domestic and export requirements.

As the growing season progressed, however, the crop was hit with bad weather. Yields deteriorated, and estimates for a high abandonment rate grew. The Aug. 12 USDA monthly crop report lowered the crop estimate to 13.05 million bales, down from the 13.5-million-bale July estimate. More importantly it was significantly below the average street guesstimate of 13.75 million bales. The abandonment rate rose to 25%, about the same as last year, but not as bad as the 36% seen in the disastrous 2011-12 crop year. Still, it was much worse than the previous 10-year average of only 10%.

Weather has improved since the August crop report and is likely to be reflected in the September crop report estimates, but much of the damage is likely done.

The status of the U.S. crop, however, is merely a diversion from the broader issues, which are decidedly bearish. Actually, to be more accurate, it should be issue, in the singular.

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