News that China was going to lower its price for Reserve cotton to domestic mills for the first time since last November was only part of the bearish story today. The proposed cut is only 4.2% lower then the previous minimum price. The bigger news was that Beijing made the announcement without any reference at all to easing import quotas in conjunction with purchases of state-owned cotton.
In the past, because China’s mills preferred the higher quality of imported cotton, they kept pleading for increased import quotas. So, Beijing would tie that to purchase of domestic reserve cotton. It was on the order of allowing a mill to import 1 tonne of cotton for every 4 tonnes it purchased from state reserves. A month ago, futures were actually supported when announcement of a coming drop in the price for Reserve cotton was supposedly going to result in a better import ratio of allowing 1 tonne of imports for every 3 tonnes purchased from Reserves.
But when Beijing made the latest announcement that it was lowering the cost to globally competitive levels, there was no announcement on import quotas at all. That’s what really triggered longs to stampede for the exit. Another element was that Beijing officials privately admitted they were under intense pressure to sell off stocks of cotton to supplement government revenues. That bodes ill for the other shoe to drop soon: China’s new target prices for farmers, offering deficiency payments in lieu of past price support policy. We strongly suspect these target prices will not be much higher than current new crop global prices and far below the government guaranteed prices of the past.
Chart-wise, the highs have held on the weekly chart and it now sports a big downside reversal likely to at least test the uptrend line, now crossing at 88.0.