Is the bottom in? I am not sure - bottoms are processes, not points, but the chart attached begs the question as we head into what is ostensibly a positive macro catalyst with the start of the Olympics in August.
For now, I am long China for a "Trade".
*Full Disclosure: I am long China via the FXI index.
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- At face, the math is simple—farmers in the US have been growing less cotton to concentrate on high-priced soy and corn while their counterparts in Brazil have also focused on soy as well as sugar cane. Poor weather in the subcontinent may reduce the harvest for India and Pakistan by as much as 10% -making for increased competition for a smaller US harvest.
Naturally the primary driver and biggest puzzle in this equation is the world’s largest producer and importer of cotton, China; and specifically the remote Western autonomous region of Xinjiang, where a third of Chinese cotton is grown.
It has been a tough year for cotton farmers in the Xinjiang. Skyrocketing rail transport costs and a rapidly tightening credit market saw inventory at east coast textile mills drop to levels as low as 15 days compared with 50 days or more at this time last year. In May, state media reported China Cotton Association estimates of 1 million tons of unsold cotton piled up in Xinjiang warehouses -by early July, that level had only reduced to 600,000. A rail subsidy announced two weeks ago by the NDRC should offset the total transport cost increase for wholesale dealers and finally get inventory flowing east again, although the exact implementation date is not clear.
Adding insult to injury, this summer has been one of the driest in decades in the Chinese North West, with some reports placing the number of hectares in Xinjiang impacted by drought at 4 million.
In sum, the harvest has been difficult and buyers scarce. With these mounting frustrations it’s no wonder that Wang Lequan, Party Secretariat of Xinjiang, has called for reduced dependence on cotton going forward by shifting some acreage into more lucrative livestock production.
Although I am always skeptical of bullish predictions coming from an exporter, Mr. Nicosia appears to have compelling data points to help support his thesis. Reduced domestic production in China combined with external price pressure could lead to higher demand for US exports despite the slowing global economy over the next harvest cycle.
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