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AM markets: China import boost spreads to cotton from corn

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It isn't just in


that Chinese buying is offering some surprise to markets.



too, the country's appetite is giving bulls some hope, with Chinese imports for last month soaring 146% year on year to 138,100 tonnes, according to the China Cotton Association.

This after a rise in purchases too in January, albeit of a more modest 20% year on year to 114,924 tonnes.

Quality factor

The increases came even as the prospect was looming of the restart (last week) of auctions from the government's huge supplies, at a rate of 30,000 tonnes a day.

But the rise in imports may not be quite the paradox it first appears, given that the cotton China has been importing seems largely of higher grade.

(The US was the top origin in January, at 50,696 tonnes. No breakdown for February is yet available.)

Rumour has it that the quality of cotton being released from government stocks is not high, and requires blending with better-grade fibre for resulting cloth to pass muster.

'Additional layer of complexity'

The question now is whether the rules of the game have shifted with the apparent decline in enthusiasm for China's cotton auctions, after a strong start.

On Tuesday, just 76% of cotton offered was sold, at an average price of 14,848 yuan a tonne.

That compares with figures of 100%, and 15,476 yuan a tonne, respectively at the season's first auction, on March 6.

"The declining sale rates, should they continue, would add an additional layer of complexity to the task of winding the Chinese stockpile down," said Tobin Gorey at Commonwealth Bank of Australia.

New York vs Zhengzhou

The decline could also mean yet further imports are needed to make-up mills' supplies – unless the reduced appetite for government supplies is indicative of some weakness in overall demand.

Whatever, the dynamics look negative for Chinese prices, with May futures on China's Zhengzhou exchange falling 0.7% to 15,275 yuan a tonne overnight, the weakest close in nearly two months.

In New York, investors were more upbeat, with May futures adding 0.9% to 77.85 cents a pound as of 10:10 UK time (05:10 Chicago time), polishing the contract's technical appeal too.

Besides taking the lot back above its 10-day moving average, the revival in prices over the last couple of sessions has boosted ideas that an uptrend in futures in particular since the turn of the year remains intact.

Quality worries

As for


- futures in which rose for the first time in seven sessions on Tuesday, on talk that China had bought anything from 100,000-500,000+ tonnes of the grain from the US – prices maintained their upswing.

Chicago's May contract added 0.5% to $3.71 ½ a bushel, distancing itself further from a two-month low of $3.60 a bushel reached early in the last session.

The talk of Chinese buying (which is said also to have included


purchases) is being treated as credible, given the time of year, with the 2017 crop not yet even planted, and questions over the quality of much of the grain in store in the country.

Terry Reilly at Futures International said: "The forward buying may have been in response to fears domestic China cash corn prices will further appreciate into the summer feeding season, and the large corn stocks sitting in Chinese inventories are of poor quality".

Such dynamics leave "compound feed producers little option but to buy higher quality imported corn".

'Spot of luck'

Commonwealth Bank of Australia's Tobin Gorey also flagged that competition in corn exports remained diminished, for now, form the dent to Brazil's supplies from the country's dismal safrinha harvest last year.

"The timing of those big [Chinese] orders is a spot of luck for US exporters," he said.

"South America still doesn't have much available for export at this point," with this year's safrinha crop, the primary source of Brazilian corn exports, still in the latter stages of being seeded.

'Confidence has been zapped'

The same is not true, of course, for


, in which Brazil's exports are ramping up as the harvest

Indeed, demand for US soybeans "has turned quiet with China crush margins negative and China seeking cheaper South American beans anyway," said Benson Quinn Commodities.

Futures International's Terry Reilly flagged the "rapid shift of soybean exports from the US to South America".

CBA's Tobin Gorey said that "Brazilian soybean prices have started to develop more notable discounts to their US counterparts", adding that "investors' confidence has been zapped by South America's huge production potentials and good harvest weather".

Corn vs soybeans

Still, Chicago soybean futures for May rose 0.7% to $10.06 ¼ a bushel in early deals – signally, recovering the $10.00-a-bushel mark which they closed below in the last session for the first time in nearly four months.

The oilseed's fortunes are linked particularly at this time of year to those in corn (and cotton) rival crops in spring sowings programmes, and the grain's outperformance in the last session reduced to 2.59 the much-watched ratio between November soybean and December corn futures.

While still in territory firmly encouraging plantings of the oilseed, rather than the grain, Richard Feltes flagged the need for incentive "to persist into May, given the well-known tendency for US corn area to exceed intentions, if early spring planting conditions are favourable".

(Corn has a slightly earlier planting window than soybeans, so area is particularly dependent on early spring conditions.)

Soybeans' fate later may depend on US crush data from industry group Nopa expected to come in at 146.09m bushels for last month, in line with the 146.18m bushels reported in February last year, but behind the 160.6m bushels seen in January 2017.

'Damage could occur'


futures also made a strong start in Chicago, adding 1.4% to $4.36 ½ a bushel, encouraged by profit-taking on short positions which have proven winning bets for the last couple of weeks, with May futures in the last session hitting their fourth-lowest close of 2017.

While rain relief is said by meteorologists to be on the way for the dry US southern Plains, "the event remains highly uncertain, as does its moisture load and distribution," Mr Gorey said.

Futures International's Terry Reilly, while underling the expectation of rains from March 22-24 that "could cover much of hard red winter wheat country", also advised investors to "look for above normal temperatures up until this event, facilitating net drying".

Furthermore, he flagged that a "cold snap across the eastern US worried some traders that damage could occur to some of the soft red winter wheat crops".

'Serious chance'

As an extra help to prices too, Egypt's Gasc tendered for wheat, surprising many investors, who believed the authority's appetite may have been sated by its huge buying spree last month.

This time, Black Sea origins are not seen as the shoe-in they have been for much of the season.

"French origins have a serious chance, considering the current competitiveness of our prices compared to Black Sea" alternatives, Agritel said.

Jordan tendered for 100,000 tonnes of wheat too.

By Mike Verdin

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