There are some sharp Aussie analysts at Rabobank, and they just released a report on cotton that is worth a quick read. As usual, we are accused of only mentioning analysis we agree with, and so be it. Rabo sees old crop futures sliding down to 83c by Jan, citing a rather slack US export demand. In the last 3 years, China had bought roughly 2 Mb by this time in the 104 week sales year, but this year the total is only ½ Mb. We mentioned total US sales commitments last week, and with China being such a diminished buyer, the overall sales number is rather puny. So with this in mind, Rabo has forecast total Chinese imports this year at only 7 Mb. Assuming the US would get a normal 40% to 45% of the total, that means the US would sell China from 2.8 to 3.15 Mb this year.
And there’s more wisdom from the Rabo analysts, in the form of a larger US crop. Where would they get that idea? Maybe they have been reading our reports, as we have consistently been saying the USDA is lowballing yields. Rabo makes mention of another aspect we have written of, that being the equalization of profits between cotton and corn. They see cotton acreage buying a few corn acres as the Southern Hemisphere gets underway. Lastly, a quote: “If elevated futures prices prevent an improvement in import demand, cotton prices may slip much lower than our forecast…………the outlook for cotton remains bearish.”
After we cut through the strong Aussie accents, we found ourselves to be on the same page as Rabo concerning market price forecasts. Now, how to get on that horse? Its not an easy ride, as one has to withstand whatever political winds come out of China. If China does what everyone thinks they will, and wait until March to announce some sort of structural change, then its fairly certain that long before March gets here this market will begin its anticipation of that event. If China goes to a direct subsidy, and simply sits on its inventory, then that would be a strung-out process that may take years to winnow down their stocks. Consider that if China’s crop is say 30 Mb, and they use 37 Mb, then they only have to import 7 Mb to make up the deficit. And that number coincidentally, is just what Rabo has predicted. Imagine that.
The highest open interest since the end of the record bull market has been in the 208k to 215k area. OI bottomed recently at 170k when Dec traded 82c, and is now up to 200k on the back of a 500 point price move. Its likely that OI may reach for that 210k-ish area once more, but stop at this level for the 5th time. It’s a month before liquidation begins for the Dec, so there is still time for OI to rise another few thousand before peaking again. Specs are buying the market right in front of the time when farmers are entering peak harvest season, so OI is expected to once again roll over from this same level.