Reserve Release....A Disappointment so Far

While China has seemed to cool the cotton market with a reserve release of 1.5 million tons over the course of several months, many, myself included, are beginning to wonder just how effective the move has been. To date, volume has not even reached 50% of the the daily alottment. To remedy this, the initial reserve price of 12,900 for 2008/09 was dropped to 12,600 yuan/ton as a way to stimulate demand from lesser capitalized mills. It has certainly helped increase volume but not as much as one would expect. Likewise, the announcement that the reserve would look to add more tonnage (keeping the 1.5 million tons in tact) from the original one million tons of 2008/09 crop to help with the shortage of high grades has achieved the opposite of the intended effect. Even today, one of the biggest concerns of the market is still the tight cash market underscored by an absence of the high grades mills want. Herein lies the choice facing the reserve: continue on and hope things work out best or release a minimal amount of import quota and let the mills buy the cotton they actually want. Otherwise, we will continue to have a very lukewarm response to reserve auction.