After getting what was perceived as a boring, neutral report, and the market seemingly perched on 85c for the near term, we thought it may be worthwhile to look at a remote possibility in which the wheels fall off the cotton market. What if China decided to pare back on imports even more than the USDA figure of 11.0 Mb, and only imported 7 Mb? At that level, their inventory would continue to rise, but not as much. Their annual deficit is about 5 Mb, so a 7 Mb import continues to compound the stocks issue, but a little less so. Assuming that the US would continue to ship China just under half of their imports, a 7 Mb import would imply US exports at only 9.0 Mb.
If the US crop production is closer to 14.0 that 13.5 Mb, and if we use a 9 Mb export estimate, end stocks rise to over 5 Mb. This is all mentioned not just for conjecture, but we must be alert to the outside edges of possible outcomes so as to protect farmers against losses too large to comprehend. The very recent collapse in exports has caused a rumble in our office, and there are a few deep thinking sophisticates out there opining that the long-awaited de-throttling of China’s appetite for cotton and other commodities is running into a brick wall of storage problems and other unintended consequences. No one is talking about this today, which means we better begin to ponder how likely it is.
There is always the other side to any argument, and for cotton the “other side” is that China decides for unknown reasons to buy +12 Mb this year. Or more. With an already tight situation in major export markets, continued steady Chinese demand would push prices to the mid 90s, easily. The more likely outcome is for neither the Big Bull nor the Big Bear theories come to fruition, and the market keeps meandering between 78c to 94c. For the short term, we lean a little negative, in spite of a dry Llano Estacado forecast.