Slow Start & High Prices Mark Start of Cotton Reserve Auction

Excellent cotton commentary on the ongoing China Cotton Reserves auction from the Globecot News Network:


A tepid response from mills toward bidding in China’s cotton reserve auctions remains the consensus view from the market, resulting in a declining average price this week. Over the first four days of the auction, hardly 59,623 metric tons, or 7.4% of the 600,000 metric tons allocated for bidding has been sold, at an average price of 18,186 yuan per ton. The commencement of the auction process is prompting some skittish merchants to lower spot prices in order to avoid the risk of paying storage costs, but few mills seem active buyers at present. The short supply of high grades is causing some mills to focus attention on the reserve auction, but few are active buyers, at least yet.

If daily auction volume continues to average roughly 15,000 tons, the 600,000-ton reserve will conclude in roughly forty trading days, near mid-October. By that time, new-crop supplies will begin to trickle into the market. While we acknowledge the auction is young, we remain intrigued at the lack of co-movement between average auction prices and ZCE futures, as the graph below demonstrates.

FCStone's Weekly Commodity Update, ( July 26th, 2010)

Download FCStone's weekly commodity analsyis for the week of July 26th. Click the following linkhttp://www.intlassets.com/commodities/fibers/Documents/Weekly%20Commodity%20Recap%20-%20Full.pdf :

More Ink for China's Cotton Market

China’s need for cotton is getting a tremendous amount of ink recently. Once it makes the front page of the WSJ or FT, you know it’s not a secret anymore. However, one of the biggest discrepancies in the information offered is the amount of imports China is expected to swallow in the 2009/2010 season. The USDA and the ICAC have projected total imports for China to be just over 2 mmt, whereas the National Cotton Market and Monitoring System (NCMMS), a subsidiary of the China National Cotton Information Center (CNCIC) as well as the China National Cotton Reserves Corporation (CNCRC), has estimated imports to be around 2.83 mmt.

This discrepancy deserves special mention due to the status of the NCMMS. The NCMMS is an information monitoring, publishing and early warning system approved by the government. This means the NCMMS is a recognized on-the-ground body assigned the task of determining intended cotton acreage, planted cotton acreage, harvested cotton acreage and total cotton output. While other government bodies offer their respective estimates and the market trades the sum, the smart money is following the NCMMS. They have 10 regional offices located in the cotton producing and consuming provinces. In addition, they have more than 200 monitoring stations in the same provinces observing the cotton crop and working directly with textile mills. Hence, they are well positioned to know exactly what’s going on in the greater cotton market in China. More importantly, the government listens to what they have to say and I would suspect makes some key decisions (perhaps the amount of import quota to be released) based on their information.  

As a result of the above, I am keen to see what type of adjustment, if any, may be forthcoming in the USDA’s May WASDE report.

India Bans Cotton Exports; China's Textile Mills in a Pinch

Breaking news from the Globecot News Network.....

In a surprise move Monday, India, the world’s second-largest exporter of cotton, announced the suspension of new registrations of cotton exports effective from April 19th 2010 until further notice. The announcement from the Office of the Textile Commissioner here impacts new registrations of raw cotton, cotton waste, and combed or carded cotton. The ministry indicated it took this action in response to the steep increase in local cotton prices, which comes on the heels of an announcement just last week of a new 3% tax on raw cotton and cotton waste exports. Ironically, while this action may ease supply constraints in India, it is likely to exacerbate the situation for foreign buyers, particularly in China and Pakistan. In turn, by effectively removing a sizable portion of exportable supplies from the world balance sheet, this is likely to boost world price as importers and exporters alike scramble to shift fiber sourcing in response to this news.

While the Office of the Textile Commissioner did not determine the exact volume of cotton likely to be affected by this suspension in new registrations, the tally originally due for shipment just in the remaining months of this marketing year is likely to be sizable. So far this marketing year, an estimated 4.4 million 480-lb bales of Indian cotton have already been shipped through the end of March. With the latest USDA forecast anticipating exports were to have reached 6.1 million bales, this implies that roughly 1.6 million bales—minus bales already registered or shipped in the first three weeks of April—now may not be shipped this marketing year. On balance, we gauge the bales likely to be subject to this suspension in the remaining three months of the marketing year at roughly one million bales.

The impact of this suspension is likely to be felt in several key importing markets across Asia. To begin with, assuming this estimate of one million bales is accurate, this will effectively remove roughly one in eight bales from global exportable supplies in the next three months. In particular, over the October – March time period, China alone imported 2.3 million bales from India, accounting for roughly 56% of season-to-date exports of Indian cotton. What’s more, India’s ten largest export markets are all net importers of cotton, meaning that with this major supplier curtailing shipments in coming months, these buyers will have to turn elsewhere to meet their import needs. At this late point in the marketing year, much of that exportable supply is likely to come from the U.S., dramatically dwindling U.S. exportable supplies and presumably driving price higher.

While we caution against drawing premature conclusions from India’s announcement, the impact of such a suspension certainly could be far-reaching and could drive global cotton prices higher. We will continue to monitor this breaking issue as new issues develop.

Thoughts on China in the Year of the Tiger

A majority of the world’s calendar year is well underway. However, roughly one fourth of this world’s year is about to close and a new one is set to begin. Of course, I’m referring to China and the coming Spring Holiday, which will usher out the Year of the Ox and bring in the Year of the Tiger. Since this blog focuses on issues dealing with China’s agriculture sector, I thought it appropriate to write the first blog on the eve of the Spring Holiday.

Here are some items of interest I’ll be watching in the Year of the Tiger:
Without a doubt, the single most concern of the Chinese government is the growing income/standard of living gap between its urban and rural residents. Enter the new circular emphasizing China’s commitment to improving and boosting rural development jointly issued by the Central Committee of the Communist Party and the State Council.

Specifically, the document declared a need for maintaining grain production and helping farmers continue raising their incomes. At the same time, it called for additional subsidies to increase the output of grain, barley, potatoes and peanuts. It even mentioned additional subsidies for agricultural machinery.

Buried within the bowels of the circular were words about strengthening the financial services to the rural sector by offering micro-credit loans and insurance. Likewise, it mentioned additional banking services to the rural areas.

I particularly noticed the commitment and perhaps because it was so boldly stated for the government to continue purchasing and stockpiling key commodities, such as corn, soybeans and rapeseed.

How I translate the above is fairly simple and straightforward. The Chinese government plans to do whatever necessary to not only stabilize its vast rural populace but will do so entirely at the expense of anyone or anything that gets in its way.

For example, while the reserve policy worked remarkably well this year, its distortion created variances either by production imbalances or price run ups/downs, which we must agree will be commonplace as long as the reserve's policy is in place. But, truthfully, this should really come as no surprise especially if you read this blog. With the commodity price run up in 2008 and the subsequent inflation, China’s government made a decision to maintain a stable food policy at all costs. Since then, they have been remarkably consistent and true to this policy. I expect more of the same in the Year of the Tiger.

Cotton Demand Set to Rebound in 2010

Excellent article on global cotton demand rebounding in 2010. The article was prepared and written by FCStone Fibers and Textiles Chief Economist, Gary Raines.
http://www.intlassets.com/commodities/fibers/Documents/CNCotton%20Yearbook%20article%202.pdf

Could Global Cotton Prices Move Higher in 2010?

Below is the link to FCStone Fibers and Textiles Chief Economist, Gary Raines, take on global cotton prices in 2010. Enjoy!
http://www.intlassets.com/commodities/fibers/Documents/CNCotton%20Yearbook%20article%201.pdf

Part 1: ICE & ZCE Could Strengthen in LH of 2009/10

Excellent cotton futures price commentary from my colleague and FCStone Fibers/Textiles Chief Economist, Gary Raines....

A Global Price Outlook for 2010
By Gary A. Raines, Vice President, Economics & Analysis, FCStone Fibers & Textiles

After the unprecedented spike in global cotton prices witnessed in 2008 and the resultant shockwaves felt thereafter across the global cotton market, prices in 2009 returned to levels more in line with traditional influences. These drivers include factors internal and external to the cotton market, and show strong correlations to futures prices. Looking ahead to 2010, these signals suggest cotton prices are likely to remain firm, above their long-term average level, as the global economy re-accelerates from a tumultuous 2008, driving renewed growth aggregate demand for cotton textiles and apparel.

Perhaps one of the most influential drivers on global and U.S. cotton prices is fundamental analysis. The study of the ebb, flow and interaction of supply and demand yields insight into current price levels and can hint at the future direction of price. A measure of this interaction, the stocks-to-use ratio, is often strongly correlated with price. More specifically, the tighter or looser the ratio between anticipated ending stocks and expected demand changes, the higher or lower we can expect price to trend. This relationship is evident in the graph below, showing that in recent months, the forecasted stocks-to-use ratio for the U.S. cotton market has fallen, or tightened. As this has occurred, the monthly average futures price has risen in tandem, breaching 70 cents per pound over the first few days in December.

Analysis of the stocks-to-use ratio can yield important clues to the future direction of price. For example, the USDA’s November forecasted stocks-to-use ratio for the 2009/10 marketing year is 35.2%, the smallest ratio in fourteen months. Not coincidentally, November’s average prices for nearby cotton on ICE Futures U.S. were 68.73 cents per pound, the highest in fifteen months. Reports of likely changes in supply and demand can cause this anticipated ratio to rise or fall, in turn driving price lower or higher in tandem.

Looking ahead to 2010, we expect the U.S. stocks-to-use ratio to tighten further in coming months, suggesting price could strengthen even further. We base our forecast on prospects that the U.S. harvest size may be smaller than currently projected, and on the belief that U.S. exports may outpace the current target in the remaining months of this marketing year. Certainly, this bullish outlook is tempered by the notion that prices already outpace the level suggested by this historic relationship. This implies that any continued appreciation in futures prices may not be commensurate with continued declines in the stocks-to-use ratio. Regardless, we look for the market to remain firm well through winter, perhaps until attention turns to the outlook for higher cotton plantings again in the spring.

Looking more broadly across the U.S. economy, factors external to the cotton market are also having a strong influence over cotton prices. First, the weaker U.S. dollar is boosting the outlook for a host of exportable commodities, including cotton. Both the dollar and cotton prices moved in lock-step over the last two years and presently stand near levels not seen in sixteen months. The outlook for the dollar in 2010 is dependent upon myriad factors both in the U.S. and abroad, including the outlook for interest rates, capital markets, inflation, government policies, and other economic indicators. While it remains impossible to accurately forecast the value of the dollar, we, along with many other market observers, remain pessimistic on the prospects for the greenback, helping support the outlook for a range of commodity prices, including cotton.