The market has been in a state of confusion ever since the latest USDA supply/demand estimate was released last Friday, as traders seem to have difficulty making sense of the data.
The main message we take from the USDA report, which includes a first look at the 2013/14-season, is that the divergence between China and the rest of the world (ROW) is going to become even more pronounced as we head into the coming season.
According to the USDA, stocks in the ROW will be at just 36.52 million bales at the end of 2012/13, down from 40.14 last season, and are expected to fall even further to just 34.15 million bales by the end of 2013/14.
That would be the second lowest stock level in eleven seasons! Only the 2009/10-season saw smaller inventories outside China at 32.41 million bales.
While ROW stocks are getting tight, Chinese stocks are reaching ridiculous proportions with an estimated 48.26 million bales at the end of this season and 58.18 million bales at the end of 2013/14. That’s an inventory the size of more than three US crops!
As long as China continues to import and stockpile vast amounts of cotton, prices in the ROW should remain well supported and may actually trend even higher. According to USDA, China imported 24.53 million last season and is expected to take in 18.25 million this season and 12.00 million in 2013/14. That amounts to a mindboggling 54.78 million bales in just 3 seasons!
The USDA estimate of 18.25 million bales for the current season may actually prove to be conservative, because in the first nine months of the marketing year China has already imported 15.95 million bales (August 2012 to April 2013) and the final tally for the season may therefore be closer to 20 million bales.
To put that into some perspective, over the last 21 months Chinese imports have totaled 40.5 million statistical bales, averaging over 64’000 bales per day!
US export sales of a combined 151’700 running bales for both marketing years were quite decent considering that only around 2.1 million bales of current crop remain available.
The fact that 18 markets participated in the buying tells us that there is still widespread demand for US cotton. Weekly shipments were once again excellent at 330’400 running bales, leaving just 2.46 million bales outstanding, which at the current pace would be shipped in just over seven weeks.
Plantings in the Mid-South and Southeast made rapid progress this week, as warmer and drier weather finally allowed farmers to move into their fields. We guess that about 60% will be in the ground by the end of this week, while the balance should get planted next week.
Texas on the other hand remains an area of great concern, since there is still no rain in the forecast and temperatures are expected to climb to 100 degrees by tomorrow. In other words, Texas finds itself once again in a race against time, and with every week that goes by traders will get a little more nervous.
