Prices to Be Largely Determined by China’s Reserve Policy
Many people have believed China’s continued buying in the coming four months could be bullish for the market – but not so.
May 16, 2012
After my predictions were very accurate during two consecutive years of higher prices, I have really missed the mark this year. As of now, I believe the intercrop demand for land should support the December cotton futures contract at 74 cents – but not many things I have said this year have proven to be correct!
Leading up to Thursday’s release of the USDA supply and demand report, the New York ICE December 2012 contract had been down for nine consecutive trading sessions. The report predicted a significantly sharp rise in both U.S. and global ending stocks. Ending stocks for the current season, ending July 31, were estimated at 67 million, a new record. The forecast for 2012/13 will be seven million more, 74 million bales, setting another new record.
These are bearish for both the short term and the long term. Many people, including myself, believed that China’s continued buying in the coming four months could be bullish for the market – but not so. Near-term Chinese buying might halt the slide in prices, but don’t look for anything above 80 cents in December unless the weather negatively impacts the crop. The new bull in the cotton market (absent Mother Nature) is bullish for four or five cents.
World stocks of this magnitude suggest that cotton prices will spend at least the next three years below that once-glorified one dollar mark but there is no firm prediction beyond that. Yet, with the bulk of the world stocks owned by the China National Reserve, that government will have the major political say in price direction, in both the short and long term.
USDA has publically stated that they believe China will gradually release those stocks throughout the year, implying that prices will likely remain between 70 and 82 cents for the next six to seven months. World production was forecast at 117 million bales while world consumption was placed at only 110 million bales. Yet, this represents a three percent increase above the 2011-12 estimate. The U.S. projected stocks-to-use ratio of 32%, which is well above the last three seasons, but only slightly above the 10-year average of 30%.
The forecast range for the marketing-year average price received by producers in 2012/13 is 65 to 85 cents per pound, compared with the 91 cents predicted for 2011/12. USDA projected that China will own 28 million bales at the end of the season, about 38% of the world total. This would represent an 86% to 90% stocks-to-use ratio in China, a truly unprecedented situation.