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Honored Advisor

Todd's Take

 

 

 


By Todd Hultman
DTN Analyst

Every now and then in the course of covering grain markets, something odd jumps out that just doesn't sound right. That happened Friday when I was going through the details of USDA's weekly export sales report and saw China was last week's top buyer of U.S. cotton.

 

China? Why would China be buying cotton? I seem to recall that China was loaded with cotton so I looked closer. Not only was China the top U.S. buyer last week, but a little over two months into the new 2016-17 season, U.S. sales and shipments of cotton to China already total 499,000 480-pound bales, which is up 343% from a year ago at this time.

 

As helpful background, October's WASDE report showed China is expected to consume 35.5 million 480-pound bales of cotton in 2016-17 and end the season with a hefty stash of 48.1 million bales or 55% of the world's ending cotton supplies.

Very much like corn, China amassed large state reserves of cotton the past several years and has struggled with figuring out how to bring down those reserves without weighing too heavily on prices. Also like corn, China's cotton mills often found it cheaper to import cotton than buy from the government so the surplus problem was slow to correct.

 

In April of this year, China's National Development Reform Commission announced they would auction off a total of 9.2 million bales (2 mmt) of cotton out of state reserves from May through August. At the time, spot cotton prices were going for roughly 60 cents a pound and many thought China's move would depress prices further.

 

However, cotton prices have been going up in 2016, not down. As an Aug. 30 report from USDA's attache for China explained demand has been so strong from China's textile sector that the government extended the auction period to the end of September and expanded the 9.2-million-bale limit.*

 

In last week's WASDE report, USDA commented, "The sale of more than 12 million bales from China's recently completed reserve auctions amid rising domestic prices suggests the China mill demand was previously underestimated."**

Imagine that.

 

So now we are discovering that not only have cotton prices been rising while China was auctioning off 12 million bales -- the same amount of cotton the U.S. hopes to export in 2016-17 -- but China has also increased their purchases of U.S. cotton this season and was first in line last week to buy more.

 

While cotton's fundamental situation has been as deceptive as a street magician's shell game, the market's technical clues have been fairly straightforward. December cotton prices began trending higher in April and broke above their one-year high in July. The December/March futures spread has occasionally shown a bullish inverse -- a bullish sign of demand that has shown commercials willing to pay up for front-month contracts.

 

The corn market heard a similar fundamental tune earlier this year that a planned release of China's large state reserves of corn were supposedly going to hurt U.S. exports and take down prices. But as with cotton, the media boys who cried wolf were mistaken.

 

As DTN Senior Analyst Darin Newsom pointed out in the Sep. 30 blog, "China Set to Export Corn ... Yeah Right," headline fears of massive corn sales were overblown and the headlines looked suspicious, as if they were designed for the benefit of Watson -- DTN's shorthand for automated traders.

 

For anyone still concerned about China's big corn pile, take a lesson from this year's cotton market. Big fundamental numbers can seem like they're etched in stone, but they too can change, eroded by the sands of time. The trick is not to let those intimidating numbers to prevent us from seeing the changes taking place right in front of us.

 

Futures spreads in corn are not showing bullish inverse -- at least not yet -- but the trend has turned higher and U.S. corn exports are off to a strong start in 2016-17. As far as bearish concerns go, all the corn in China is not one of them.

 

* USDA Foreign Ag Service, People's Republic of China Cotton and Products Update prepared by Jennifer Clever and WU Xinping, Aug. 30, 2016 at: http://bit.ly/…

 

** USDA cotton comment found on page 5 of USDA's World Agricultural Supply and Demand Estimates, Oct. 12, 2016 at:http://bit.ly/…

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