Johnson On Cotton: Let’s Hope China’s Mills Stay Busy

    Several factors should boost cotton consumption not the least of which is the much lower price at the start of the season. The outlook is for a rise in price in the second half of the season but not to the highs of the past 3 years allowing some recovery in mill usage of cotton. The US economy is seen improving in 2014 (after a poor start in Q1) and 2015, with signs of a turnaround in China’s economy, as well.

    Global GDP growth has been linked with cotton 2 consumption in years past but China’s past 3 years policy of 0 buying up the vast majority of its production has resulted in a ‘disconnect’. The combination of a stronger world economy and Chinese mills having greater access to its crop should boost consumption, although it will be several months if not well into 2015 before the jump can be quantified.

    My projected consumption number of 113 mln bales is unchanged from last month and an increase of 1.7 mln above the USDA. I do not look for the USDA to raise their estimate by this much and in fact they may not make a change for this month but overtime, their figure should expand for some of the same reasons discussed above.

    As with mill use, trade should increase as well and by more than the USDA or my figure of 36 mln bales indicate. US exports will be higher and Chinese imports as well but by how much will correlate with the final size of production in both countries as well as India’s. Production for different reasons will fall from two other major exporting countries, Brazil and Australia, which have become quite active shipping in late spring/early summer. Both the US and India will benefit from their smaller crops also helped in part by their cheaper price relative to some other growths.

    Due to my larger usage figure, ending stocks are forecast at a lower figure of 104.2 mln bales vs the official of 105.7 mln. Since both are not only a record but a huge historical record, the difference of 1.5 mln bales hardly warrants a discussion.

    There is already considerable talk of little change in this year’s all-time high figure with carryout, but 2015/16 is looking very different. Cotton production could fall in some key countries such as China. A modest recovery in grain/soybean prices could pull acreage from cotton here or abroad. If El Nino makes a strong return this fall/winter/following spring, acres will shift to other crops across Texas so prices, weather and government policy will be crucial.

    Considering some of the problems facing cotton, much of it could be solved if China had a ‘game plan’ for reducing their state reserves. For instance, one way to trim world beginning stocks is if Beijing’s policy makers were more successful in auctioning off a larger portion of their state reserves in the upcoming crop year.

    However, quality problems with those reserves will hinder their efforts unless Beijing is willing to lower the price, an approach that could set off a much larger global price break, a risk that is unacceptable.

    The second possibility is to allow Chinese mills to import more quality cotton to blend with poorer quality stocks on hand allowing them to improve the value of textile goods especially that destined for export channels. Since much of the upcoming crop will not be available until late fall and there may issues with color, staple, micronaire, etc., due to weather, foreign imports will become all the more important.

    As counter­productive as it may seem for higher imports, China’s mills would increase usage levels, state reserve levels would shrink and some of the world’s excess would be taken off of the market.

    In conclusion, the USDA in its upcoming supply & demand report is likely to raise US and Indian production and may reduce China. I do not foresee much of a change with consumption. US exports should be raised but an increase to Chinese imports is debatable. I do not necessarily agree with the talk of prices falling as low as 55-57 cents, but if the 62-cent level is breached, another 2-3 break could easily unfold.

    I remain of the opinion this month’s report will be bearish and possibly very bearish but the price break since late June reflects as much. October forward I look for some improvement in fundamentals but overseas harvest pressure may prevent much of a rally in futures. Unlike the past 2 to 3 years, US producers will be using the loan program extensively as a home for that portion of their crop not already priced.

    Note: There have been no updates by any of the Ag Attaches in the past week or so which is odd, given some of the critical changes occurring on the supply side. I generally wait until a day or two before of the USDA monthly report with my last pre-USDA report to include any AA data but it appears they will be not be released until after the USDA supply/demand report.

    Sharon C Johnson, @Copyright 2014

    The views and opinions offered in this report are solely those of Sharon C Johnson, an introducing broker for KCG Futures. The information contained in this report is taken from sources she believes to be reliable but is not guaranteed as to accuracy or completeness and is sent to you for information purposes only. Reproduction in whole or in part or any part or any other use without permission is prohibited.

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