Howell: Cotton remains on defensive amid China stockpile sales

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Ongoing sales from China’s huge government stocks, USDA’s first detailed 2016-17 supply-demand forecasts and a larger-than-expected reduction in U.S. 2015-16 export prospects contributed to keeping cotton futures on the defensive last week.

Spot July lost 106 points for the week ended Thursday to close at 60.73 cents. It closed back below its 200-day moving average on Monday, remained below it on a closing basis and posted back-to-back intraday lows at 60.55 cents, lowest since April 18.

December dropped 44 points to settle at 60.57 cents. Price relationships following the USDA reports promoted conjecture about some planting shifts to soybeans from cotton in the Delta and Southeast.

China’s sales of reserve stocks in the first week totaled 102,350 metric tons (552,757 480-pound bales), 99.9 percent of the offerings, the U.S. agricultural attaché in Beijing reported.

The auctioned volume already has almost doubled the sales during all of 2015. Imported cotton was fully sold and accounted for 77 percent of the first-week sales. This indicates a serious shortage of high-grade cotton for China’s textile mills.

Industry sources said imported U.S. and Australian cotton were the most popular and also were purchased at a higher price.

The sales and curbs on import quota availability are factored into expectations for China’s 2015-16 imports to fall to a 13-year low at 4.5 million bales, down 250,000 bales from the April estimate and down 4.03 million bales from last season. Imports in 2016-17 are projected to rise to 4.5 million bales, still only 18 percent of the record four years ago.

A projected 2016-17 U.S. crop of 14.8 million bales, up 15 percent from final 2015-16 production, is expected to boost domestic ending stocks well above the beginning level to 4.7 million bales.

Those would be the largest ending stocks since 2008-09. The crop forecast is based on the March prospective plantings of 9.6 million acres, below-average abandonment of 7.95 percent, relatively favorable moisture and yields of 807 pounds per acre.

A survey of cotton analysts by The Wall Street Journal had shown average estimates of 14.6 million bales for the crop and 4.4 million bales for ending stocks.

The USDA projected exports to rise to 10.5 million bales on higher available supplies and more marketable qualities, while domestic mill use is expected to hold steady at 3.6 million bales.

Estimated exports for this season fell 500,000 bales to 9 million, reflecting lower-than-expected sales thus far, with ending stocks rising accordingly to 4 million bales.

The stocks-to-use ratio is projected to rise to 33.3 percent in 2016-17 from an upwardly revised estimate of 31.7 percent this season. The April forecast for 2015-16 was 26.7 percent.

Globally, production is projected 6.42 million bales shy of mill use in 2016-17, compared with an estimated shortfall of 9.48 million bales this season. The world stocks-to-use ratio expected to decline to 87.1 percent from 94.3 percent now foreseen for 2015-16.

World ending stocks are projected to decline 6.2 percent to 96.48 million bales. Falling stocks in China are expected to account for the global drop, with stocks outside China forecast up slightly to 39.76 million bales. China’s stocks are 169 percent of its cotton offtake.

Final tweaks in U.S. 2015-16 production were as expected, putting all-cotton output at 12.888 million bales, up 20,000 bales from the April forecast but down 55,000 bales from the annual crop summary in January. Yields at 766 pounds fell 63 pounds below the five-year average.

While upland production in Texas showed only a 30,000-bale drop to 5.72 million, some notable revisions were seen in districts. Production on the High Plains fell 202,300 bales from the January estimate to 3,797,700, with the northern area up 91,500 bales to 731,500 and the southern area down 293,800 bales to 3,006,200.

On the current U.S. crop scene, planting quickened to 10 percentage points to reach 26 percent completed during the week ended May 8, up three points from a year ago and even with the five-year average.

Growers had planted 18 percent in Texas, compared with 21 percent on average, and 24 percent in Georgia, up from the average of 21 percent. Four percent of the Texas crop was squaring, up from 3 percent on average.

Planting trailed the average in only four states other than Texas: Kansas, Louisiana, Oklahoma and Virginia.

On the demand front, weekly export sales of 108,700 running bales for shipment this season brought 2015-16 commitments to 8.291 million RB. Commitments narrowed the gap behind year-ago bookings by 42,000 RB to 2.335 million RB, or to 21 percent, and were 95 percent of the estimate. A year ago, commitments were 97 percent of final 2014-15 shipments.

Shipments of 180,700 RB boosted the season’s total to 6.222 million RB, 71 percent of the forecast, compared with 73 percent of final 2014-15 exports at the corresponding point last season.

The lag of shipments behind year-ago exports widened 71,000 RB to 1.723 million RB, or to 22 percent. Shipments now need to average roughly 209,000 RB a week to reach the USDA forecast, which is 20 percent below year-ago exports and would be the lowest since 2000-01.

Net sales for shipment next season of 5,400 RB nudged 2016-17 commitments to 1.886 million RB, compared with year-ago forward bookings of 1.177 million RB.

Meanwhile, trend-following funds boosted their net longs by 1,612 lots to 30,397 in cotton futures-options combined during the week ended May 3, according to government traders-commitments data.

They covered 1,598 shorts and added 14 longs, raising their net longs to the highest since Jan. 5. Index funds upped their net longs by 736 lots to 70,683, while nonreportable traders traded to almost a standstill to edge their net longs up four lots to 4,769. Commercials upped their net shorts by 2,352 lots to 105,847, adding 3,412 shorts and 1,060 longs.

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