These pages have written many times that no matter what happens with Chinese purchases, their existing stocks are big enough to not need a bale of imports for over 2.5 years. On the other side is the history that China has defied balance sheet logic and purchased many millions of bales it does not need for months and years. Cotton is clearly an easier commodity to buy and sit on, than perishables such as pork, soy, corn.
Trading cotton for the next 2 years will have a huge political factor in it, as China tries to satisfy, or appear to satisfy, terms of the trade deal. We are balance sheet analysts, and abhor the thought of having to “adjust” for the real real possibility of China buying for state reserves, akin to their kidnapping of the world cotton market beginning in summer 2010. While we don’t see buying in those amounts for this trade deal, the next few years will likely see a swelling of stocks to give the perception that China has met its commitments.
TechnicalsFrom Dave Toth, RJO tech analyst: This morning’s break below 6973 confirms a bearish divergence in momentum. This resumed weakness leaves Friday’s 7137 high in its wake as the latest smaller degree corrective affair consistent with the major bull trend from Aug 5765 low to eventual new highs above 7196. In this regard, this 7137 high becomes our new short term risk parameter from which non-bullish decisions like long covers and cautious bearish punts can be objectively based and managed. Until and unless such 7137+ strength is shown and given the magnitude of even just Nov-Jan portion of the impressive rally, the extent of even a correction lower, let alone a reversal is indeterminable and potentially severe.
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