Buying Time Is When Cotton Price Drops To 65-70 Cents

This week (until Thursday) New York Cotton season Under new pressure, 12 contract fell 336 points to 72.59 cents.

The technical side led the market to rebound. The contract in December went all the way from the low of 70.74 cents on August 3 to the high of 77.07 cents on August 9. After the USDA released the report last Friday, the market rally stopped abruptly. At the end of 2012/13, the inventory increased significantly by 2.28 million packages. Therefore, this supply and demand report was regarded as a negative by the market.

Although the market's upward momentum had weakened before the report, the USDA put a firm lid on the market by bearish outlook, which accelerated profit taking by speculative bulls and trade arbitrage selling. The latest CFTC report confirmed that speculators bought a technical breakthrough at the beginning of August, and net long positions increased by nearly 10800 hands, while trade increased net short positions by 9100 hands, and index traders sold 1700 hands.

Even though the US Department of Agriculture has increased US production by 650000 bales to 17.65 million bales, and the global ending inventory has increased by more than 2 million bales, making this supply/demand report mainly negative, it is still worth looking carefully at where the report has been adjusted. As we have mentioned repeatedly in recent weeks, there is no longer a single market in the United States, because the domestic price in China is higher than 130 cents/pound, and then the price in other parts of the world is about 50 cents/pound cheaper.

Therefore, if we look at the USDA report from the perspective of China and the rest of the world, we will see a completely different scenario. Although China's inventory at the beginning of the year increased by 1.95 million packages as of August 1, the inventory at the beginning of the year in other parts of the world decreased by 830000 packages. This situation is similar to the expected ending inventory at the end of this year. China seems to increase 2.38 million packages, while the inventory in other parts of the world is expected to decrease 100000 packages. In other words, looking at China, these inventories are negative, but looking at the rest of the world, inventories are friendly.

Last week we talked about countries and regions other than China cotton The supply is relatively tight. On August 1, the inventory in other parts of the world reached 38.52 million packages at the beginning of the year, compared with 35.32 million packages a year ago and 29.62 million packages two years ago. At that time, the inventory was very tight, followed by a historic bull market stage. However, even though we now have more abundant cotton stocks, the spot market still feels relatively tense at present, because most of these stocks cannot enter the market at any time, as explained in our report last week. This situation may change in about 6-8 weeks. At that time, cotton in the northern hemisphere will begin to enter the market. We expect that the price will bear some pressure at that time.

Whenever there is a huge price difference between the two markets, goods will flow from the cheaper market to the more expensive market, as long as this is allowed. Over time, this approach should lead to a price balance between the two markets. However, in the case of cotton, this has not yet happened. Even if China imported 24.25 million bales of cotton last year, a record high, and yarn imports increased significantly, we did not see prices rise in other parts of the world, nor did we see prices fall in China. The reason is that the Chinese government has collected all the surplus cotton in the domestic market and put it into the strategic reserve. Cotton prices in markets other than China remain low because traders focus on global statistics and are generally not optimistic about the market prospects.

This year's price direction will largely depend on China's imports. Although China theoretically has enough cotton, and its own production and large reserves can meet the demand of domestic textile mills, China may still import cotton for price reasons, because if export-oriented textile mills buy cotton at a domestic price of more than 130 cents/pound, they will not be able to participate in the competition in the international market. It has been rumored that approximately 400000-50000 tons of processing trade quotas will be approved in the near future, and these quotas will be distributed to textile mills exporting finished products.

At present, the US Department of Agriculture estimates that China will import 13 million bales this year, slightly higher than China's imports last year. According to this figure, the inventory in other regions of the world will increase slightly in this process, reaching 20.49 million packages in July next year. Although the inventory will present a mild negative, it cannot prove the price decline, especially when we consider that the price of grain and soybeans is more attractive, and the cotton planting area may decrease a lot.

In the coming months, the cotton situation in India needs to be closely watched. Although the recent rainfall has improved, raising farmers' hopes, meteorologists warn that the strong El Nino phenomenon may disrupt the monsoon progress. The chief forecaster of the Indian Meteorological Bureau pointed out that the monsoon may enter a stage of rainfall reduction in late August, especially September. If India's cotton production is reduced, it may lead to India's withdrawal from export competition. This will make the United States a dominant export country and give it pricing power.

So where should we go? According to what we know today, we believe that in the coming months, the price will be relatively well supported, because the spot supply is still tight. Once new cotton enters the market, we may see that the price is under some pressure during October and November, but from December, the market will begin to turn its attention to new cotton planting, which will provide support for the market. Of course, much depends on what China will do in the next month. But unless China closes its door and does not import a large amount of cotton, the cotton prices in other regions of the world will be relatively well supported. From a longer-term perspective, we believe that Cotton price When it drops to the 65-70 cent window, you should buy.