China quality fears revive cotton price rally in US

China quality fears revive cotton price rally in US

Cotton futures revived their rally, taking gains this month above 7%, as concerns eased over the implications of a huge Chinese auction programme, while growing over US sowings.

Cotton futures for July, New York’s best-traded contract, stood up 3.6 % at 62.18 cents a pound in late deals on April 18, 2016. Earlier, they came 0.02 cents a pound from touching their 200-day moving average for the first time in three months.

The gain followed a positive performance too by futures on China’s Zhengzhou market, where the best-traded September contract settled up 1.2 % at CNY 11460 renminbi per tonne, taking headway for this month to 12.0 %, and helping undermine fears over an announcement of cotton sales from state reserves.

China on Friday said that it sell up to 2 million tonnes of cotton between May 3 and August 31, 2016 from state reserves generally estimated at about 11 million tonnes. “While Friday’s announcement itself was no surprise, the volume on offer was probably higher than what the market had expected,” said Tobin Gorey at Commonwealth Bank of Australia.

Military intervention?

However, on a more price-positive note, the Chinese government also announced it was to purchase high-specification cotton, at market prices, from September to February to improve the quality of its reserves. “That is a major issue,” said Louis Rose at the Rose Report. “It seems to everyone that the quality of China’s stocks is very questionable,” he told, adding that that there have been concerns too over the level of supplies actually available to mills, despite the large quantities in state reserves. “Buyers have been waiting for reserve cotton,” Rose said, adding too talk of a squeeze on supplies from Xinjiang in far north west China, the top cotton growing province, and which has a degree of autonomy in its affairs.

“The military has a bigger influence in Xinjiang, and sources have told us that they have been upset with the government’s reserve sales plan,” prompting them to “hold back some cotton from the market”.

Complete surprise

Furthermore, some investors have interpreted as bullish an unexpected change in terms of repayment rates for a US government loan programme, which is aimed to allow US cotton farmers to spread sales through the season, rather than being forced to sell at harvest to raise cash.

The US government – in raising by 2 cents a pound the cost of redeeming loan cotton, thanks to an increase to the transportation adjustment – effectively issued a “USD 10-a-bale penalty for every US grower holding cotton and every merchant owning loan equities”, said Bean & Bean Cotton Company said. “While transportation adjustments have been made in the past, they are historically small annual adjustments made in August, not ‘gotchas’ (got you) sprung on an unsuspecting industry during a critical period of the marketing year,” the Missouri-based cotton trader said.

The move had “done damage” to the industry, with a direct financial hit, pegged at USD 35 million, and “more concerning is the unpredictable nature of the adjustment”, said to have come as a “complete surprise”.

Reduced sowings hopes?

Rose said that the move has “probably cut into the amount of cotton acres” likely to be planted in the US this spring, especially given the increasing financial appeal of sowing soybeans, prices of which last week set eight-months highs in Chicago. However, he was cautious over expecting the rally to last too long, saying that, against a background of strong world supplies, “I do not see cotton getting above 65 cents a pound”.

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