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Morning markets: Cotton futures make strong start, amid talk of China purchases

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Would a China-US trade deal come just in time for cotton bulls?

 

The US is typically a hefty seller of the fibre to China but its shipments of cotton on this route (especially of high-grade pima) have been curtailed amid the countries’ trade war, and its knock-on effects.

 

Chinese mills have been able to turn to alternative cotton exporters such as Australia and Brazil, as well as to supplies freed from Beijing’s huge release of cotton from its stake stockpiles.

 

However, there is some speculation that China, having run down its stocks considerably through a series of auction programmes, is in the market for fresh supplies, including imported ones.

 

‘Demand for foreign supplies expected up’

The latest Chinese auction programme, which ended last month after selling more than 4.5m bales from reserves, has left the country will “just under 9m bales” in its stockpile, on US Department of Agriculture estimates.

 

“This level is consistent with government’s objectives and is down from nearly 60m bales in March 2014,” the USDA said.

 

This will herald a phase of the reserve “auctioning old-crop and replacing with both new-crop domestic cotton and imports for the first time in years.”

 

This means that “the state reserve’s demand for foreign supplies is expected up in 2019-20”.

 

‘Supportive-to-bullish factor’

And there is talk that such purchasing has begun.

 

Louis Rose at Rose Commodity group said that in the last session, “the big news, or rumour, was that China bought more than 460,000 bales for its strategic reserve from Brazil.

 

“If China is, in fact, purchasing for its reserve, this is truly a supportive-to-bullish factor in that it could reduce effective world carryout noticeably,” with stocks held in China not seen as available to the market, and so less impactful on prices.

 

While Brazil has received this initial, alleged, order, a China-US trade deal would of course raise the chances of futures business coming from Gulf ports.

 

Prices gain

Certainly, December cotton futures gained 0.8% to 65.32 cents a pound as of 09:45 UK time (04:45 Chicago time), close to four-month highs, and contrasting with a sluggish start by grains.

 

Nor did overnight USDA data on domestic crops appear responsible for the divergence.

 

The condition rating for the US cotton crop did fall, but by a modest 1 point week on week to 40% rated good or excellent as of Sunday.

 

US cotton harvest progress, at 46%, was up 6 pints week on week, and remained ahead of the five-year average, by 3 points.

 

Grains weaken

In Chicago, by contrast, all the three main contracts, corn, soybeans and wheat, traded lower, after finding little to support them in the overnight USDA data.

 

Indeed, for corn, the good or excellent rating improved by 2 points to 58%, rather than holding steady as investors had expected, with the increase led by a 9-point surge in the reading for the key growing state of Illinois.

 

This undermined one of bull’s rationales, with ADM Investor Services noting that “some feel corn should find support from talk of lower US 2019 supply”, and expectations of a yield downgrade in the USDA’s next Wasde crop briefing, in two weeks’ time.

 

Corn harvest progress, at 41% complete, was 2 points lower than investors had expected.

 

Nonetheless, Chicago corn futures for December stood down 0.3% at $3.82 ¾ a bushel.

 

‘Record South America crops’

Chicago soybean futures for January were 0.4% lower, at $9.32 ¼ a bushel.

 

The US soybean harvest progress figure, at 62% complete, was bang on market expectations, and up 16 points week on week, if 16 points behind the typical level of advancement by now.

 

“Talk of record South America 2020 crops and higher US 2020 US soybean acres is offering long-term resistance,” to prices, said ADM Investor Services, although noting too the more supportive “positive talk about US and China trade deal”, although this prop may be wearing thin for now.

 

The soybean market also faces the complication of the looming expiry of the November contract, against which deliveries will be keenly watched as a sign of how appealing the exchange is for physical sellers.

 

This when month-end is approaching too, viewed as a time when funds adjust portfolios, typically with negative effect (with month-beginnings seen as a more positive time).

 

‘Current competitiveness’

Certainly, wheat futures were lower too, easing by 0.2% to $5.11 a bushel for December, remaining under some pressure from jitters ahead of a Gasc tender to be announced later on Tuesday, and which will show the relative state of play of prices in leading exporting nations.

 

This when the weekend’s Argentine election result is seen as potentially lining up a series of competitively-priced shipments from the South American country, as merchants attempt to beat export tax rises expected by the new regime after it takes office in December.

 

Still, in Paris Agritel said that the Gasc tender “should be a chance for French origins to demonstrate their current competitiveness”.

 

‘Disrupted by heavy rainfall’

Agritel also noted that “wheat sowing in France are disrupted by the heavy rainfall, pushing some farmers to use ploughs to facilitate plantings”.

 

(Certainly in the UK, ploughs can be used in such circumstances to turn over wet soils to hasten drying.)

 

In the US, winter wheat sowing was rated 85% complete, 2 points behind the figure expected, amid some worries too that slow corn and soybean harvesting may prevent some plantings, in leaving land tied up with standing crop.

 

The initial USDA winter wheat condition rating of 56% good or excellent was in line with typical levels, if 1 point behind market expectations.

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