Too Bearish To Imagine

Softs

A short press release today reads:  “China as early as next year could end its corn stockpiling program, an analyst with private firm Shanghai JC Intelligence Co. told Reuters. The stockpiling policy has inflated domestic prices, caused increased imports and resulted in a bulging inventory of older corn supplies in state-owned reserves. An official with a Chinese state-run think-tank told Reuters the government is “under huge pressure” to change its corn policy as it’s distorting domestic supply/demand balance.”  One can delete the word corn and add cotton, and have the same story.  Lets not be surprised if down the road China unwravels the cotton monster.

The Indian monsoon is forecast to make a more prominent appearance in about 10 days.  So far its performance has been lacking.  If one split India with a north-south vertical line, the western half is where most of the cotton is grown.  Rainfall has been deficient in the northwest.  India’s production has grown so much over the last decade that it could conceivably lose 10% from normal, or around 2.5 to 3.0 Mb.  This is ironically about the same amount of cotton that Texas is likely to gain due to almost perfect weather.  Table below shows our estimates by district of Texas yields.  Enjoy.


                                                Varner View

If China simply ceased stockpiling corn, cotton and other commodities, then it would be easy to figure out how much they would import.  A guess of the China cotton production is at 30 Mb, and they use 38 Mb, so they would theoretically import 8 Mb.  The US would come in for at most half that figure.  The USDA estimates that China will import exactly that amount, so the bureaucrats are doing the same simple math we are.  But what is left unsaid is what happens to the massive inventories of reserve commodities?  That’s where the wild cards are, and if China does decide to gradually empty the warehouses, then figuring out what the price will be is a whole different matter than just assuming the inventories stay as they are.  If China sells nothing from reserves, we think price tests the mid 60s.  If they sell off reserves, it’s a different ballgame.

 

                                           Technicals

 

The Dec continuous is attempting to fill a gap left from the roll of Dec 12 to Dec 13, right at 7200.  Momentum is extremely low, so expect a consolidation or small bounce.  Seasonals are negative.  Sell rallies of 2-3 days.

 

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