Over the past few weeks, the Rupp Report concentrated on reports from the recent ITMF conference in Beijing. Recent reports included some information about the global cotton situation including China’s cotton policy, and the some 10 million metric tons of cotton that are stored in China and are waiting to reenter the market.
 
However, how has cotton fared over the past few months? United Kingdom-based Plexus Cotton Ltd. wrote in its June 5, 2014, Market Report: “NY futures remained under pressure this week, as July gave up another 67 points to close at 85.48 cents, while December dropped 100 points to close at 77.38 cents. The market is in search of a solid bid, but with fundamentals and technical indicators both in bearish mode, the path of least resistance continues to be down for now. July has so far given up over 900 points since closing at 94.75 cents exactly a month ago, while December is more than 700 points below its high of 84.53 cents.”
 
A Rollercoaster
In its June 19th Market Report, Plexus reported: “NY futures closed mixed this week, as July rallied 274 points to close at 88.36 cents, while December dropped 70 points to close at 77.13 cents. … U.S. export sales continued to surprise positively, as a total of 258,700 running bales of Upland and Pima were sold last week, whereof 155,200 running bales were for June/July shipment. Indonesia (91,700 bales) and Vietnam (66,100 bales) were the most active buyers for nearby shipment and this seems to indicate that mills in the Far East still have a lot of holes to fill until new crop.” The rollercoaster continued when the NY futures came under further pressure a week later, “as December dropped 250 points to close at 74.63 cents,” according to the Plexus Market Report dated June 26.
 
More Competitive Chinese
China is trying to transform itself into a modernized society that is more competitive and produces better quality goods. This transformation also extends to China’s textile industry. For some time, China has imported a lot of cotton yarns; local products made of more expensive Chinese cotton were not competitive. However, this is changing now. As statistics show, Chinese yarn imports of 131,639 metric tons at the end of June were at the lowest level in eleven months. This is certainly because Chinese spinners are becoming more price competitive thanks to a drastic reduction in the domestic cotton price.
 
In early November, the situation changed again. According to the Plexus Market Report on November 6: “NY futures moved lower this week, as December lost 131 points to close at 63.19 cents/lb, while March dropped 74 points to close at 62.28 cents/lb. … Since October 6, the March contract, which as of today owns the highest open interest, has closed no lower than 61.71 cents and no higher than 63.27 cents, a range of just 156 points in 24 sessions! … The market seems to be boxed in between strong resistance stemming from a global oversupply scenario that is likely to persist for quite a while, while support comes mainly from government programs in the U.S. and India that keep supply pressures in check.”
 
The U.S. Influence
The November 6 Plexus Market Report said: “The U.S. marketing loan program pays growers 52 cents/lb for their cotton, which corresponds to over 80 percent of its current market value. The grower then has 9-10 months to redeem his cotton at the AWP [adjusted world price], which is determined by the A-index. … Paradoxically, the more bearish producers are, the longer they may leave their cotton in the loan in anticipation of a falling AWP.” To make it short, Plexus thinks that it may be more difficult to get cotton out of grower hands than in previous seasons.
 
And The Situation In India
As it is well known, India wants to play a more important role in the global textile industry in general, and the cotton industry in particular. Recently, the Cotton Corporation of India (CCI) has started to procure cotton at the minimum support price (MSP) in several states, which has kept cash prices fairly stable just nearby 70 cents. Even if the government ended up buying only 10 percent of the crop, which would equate to around 4 million local bales, it would probably be enough to keep Indian prices well supported. According to Plexus, the psychological effect of these programs can be quite potent, “because the perception of a safety net will keep growers from panicking, while mills are more confident to buy near the MSP and traders are reluctant to undercut prices.” That makes a lot of sense.
 
Further Drop
By mid-November, the NY futures had dropped sharply. “New York futures dropped precipitously this week, as December lost 346 points to close at 59.73 cents/lb, while March fell 353 points to close at 58.75 cents/lb,” said Plexus in its November 13th Market Report. Plexus reported speculators are in the game. “The USDA report contained basically no surprises, apart from Burma being added as a previously unrecognized cotton producer and consumer with 630,000 bales in production and 700,000 bales in mill use. Other notable changes were production increases in the U.S. (+140,000 bales) and West Africa (+150,000 bales), while Central Asia (-120,000 bales) and Australia (-100,000 bales) saw their crop numbers lowered,” according to Plexus.
 
The report continued, “Global ending stocks are now predicted at a record 107.36 million bales, which are 5.63 million bales more than last season. More importantly, ROW [rest-of-the-world] ending stocks are expected to increase from 38.8 to 45.2 million bales, a jump of 6.4 million bales, as Chinese imports of 7.0 million bales won’t be enough to offset the ROW production surplus of 13.3 million bales. The only way to remedy this inventory overhang that now exists in China as well as the ROW is to discourage production and to stimulate consumption via lower prices.”
 
The most recent U.S. Commodity Futures Trading Commission report as of November 4 showed the trade at 6.0 million bales net short, while Index funds were 5.9 million bales net long and speculators had just a very small 0.1 million bales net long.
 
According to the Plexus Market Report for the week of November 20: “New York futures closed mixed this week, with the soon to expire December losing another 119 points to close at 58.54 cents/lb, while March gained 11 points to close at 58.86 cents/lb. … Although the market feels heavy, the unusually slow movement of the U.S. crop into marketing channels has so far prevented values from caving in. When we look at the latest EWR (Electronic Warehouse Receipts) report and the weekly export shipments we have more than just anecdotal evidence that farmers continue to withhold cotton in an effort to maximize their loan deficiency payments.
 
Holding Back Stocks
The November 20th Market Report continued: “As long as the AWP (Adjusted World Price) is trending lower week after week, growers will continue to hold back both their sold and unsold cotton in order to capture additional payment benefits. For our readers who are less familiar with the US loan program, a grower has the option to put his cotton into the government loan, for which he gets paid 52 cents, and he then has 9-10 months to buy his cotton back at the AWP (currently 46.12 cents) or at the loan plus carrying charges, whichever is cheaper.
 
“The AWP first dropped below the loan level in late September, or about the time when the US crop started to get harvested, and has trended lower ever since. AWP redemption values are always fixed for an entire week, from Friday to Thursday, and for the coming week the AWP is set at 46.12 cents, which is 245 points lower than in the previous week. That’s enough incentive for many growers and coops to hold on to their cotton a little longer.” However, Plexus said not all growers will benefit from this loan game.
 
Fewer U.S. Exports
“The EWR shows that 6.4 million bales of US new crop are currently listed as ‘open’ and that only a little over 0.8 million bales are ‘under shipping order’ to domestic and foreign destinations,” continued the November 20th Market Report from Plexus. “In other words, the cotton is there, but it is not being applied and shipped as fast as it should, which we attribute to the above-described situation. The US export sales report is another piece of evidence in that regard, as last week only 66,600 running bales got shipped. So far only 1.4 million statistical bales have been exported this season, which is over 600,000 bales less than a year ago.
 
“US export sales on the other hand were quite decent in the last two weeks, amounting to a combined 360,400 running bales of Upland and Pima cotton for both marketing years. Sales are not the problem, as total export commitments for the current season have already reached 6.6 million statistical bales or 66 percent of the expected total.”
 
Uncomfortable Situation
And now? “As long as the AWP keeps falling, it will be difficult to get enough US cotton into the system to alleviate the current bottleneck,” said Plexus. “Merchants are desperate to get their hands on cotton, especially for supplies they have already bought. The current AWP calculation of 45.86 points to yet another week of increasing subsidies, which would keep most cotton locked away.”
 
The heat is on! The Plexus experts see the market range bound in the near-term future somewhere between 57 and 62 cents.
 
December 2, 2014

The Rupp Report already informed its readers in some articles after the annual ITMF conference in Beijing about the Chinese government’s desire to lead the way in many sectors of the industry. China again made global news at the recent summit of the Asia-Pacific Economic Cooperation (APEC).
 
As with World Trade Organization (WTO) negotiations, APEC is another way to reach free trade agreements among Asia-Pacific countries. Similar to at the ITMF conference where the Chinese delegation pushed some ideas it wished to implement, China’s state and party chief Xi Jinping presented some ideas at the APEC summit.
 
The Chinese Dream
It is obvious to see that China wants to be back at the top. Just before the summit started Xi presented his “Asia-Pacific Dream” to business leaders, based on China’s economic strength and the mutual benefits of which the entire region would profit.
 
Just like the new president ITMF President Wang Tiankai, Xi wants to use APEC to improve China’s regional interests. He announced the creation of an investment fund for his project of a so-called “Maritime Silk Road.” Also, the recently initiated Asian infrastructure investment bank, which is a clear counter-project to the Asian Development Bank and the World Bank, is part of this strategy. Xi previously presented his vision of the Asia-Pacific at the APEC summit a year ago in Bali. However, just like at the ITMF congress, China was the host country for the APEC summit and set some important points on the agenda.
 
In Search Of Some Agreements
In the Asia-Pacific region, there are several attempts to create larger regional free trade agreements (FTAs). To push the free trade area for the Asia-Pacific region, China wanted to finalize a kind of road map, which should include a feasibility study. APEC foreign ministers declared this vision could become a reality. However, instead of a feasibility study there should be only a strategic study, which proved to be a damper for China.
 
As a counterpart, the United States mentioned these talks are not the start of a new free trade zone, but the confirmation of a long-term target to be sought after. Certainly the United States was thinking about the plans for a Trans-Pacific Partnership (TPP), which was launched without China’s participation. However, it seems that China also is interested in joining the TPP. Despite troubles, it must be mentioned that APEC with its membership structure is the only regional group that includes China, the United States, Russia and Japan. Virtually half of world trade and more than half of the global gross domestic product is generated by the 21 Member States.
 
United Against Corruption
Despite discrepancies, there was one Chinese success: The adoption of an agreement for cooperation in corruption cases. The APEC Network of Anti-Corruption Authorities and Law Enforcement Agencies (ACT-NET) should help prevent corrupt people finding refuge in other countries. However, the network does not solve legal problems. China has treaties with only a few countries, and many states are reluctant to participate because of the non-free and politicized justice of China.
 
The Wind Changes
 
A few days later, the sound of the music changed. Indeed, a final declaration was published advancing the FTA Asia-Pacific (FTAAP) in the focus of the final document. Host Xi again called on the 21 statesmen gathered from East Asia, the Americas and the Pacific region to accelerate liberalization of trade. The vision should become reality as soon as possible. However, foreign ministers of the other participating countries supported the Chinese project somewhat less enthusiastically.
 
Nevertheless, the final document contains a multi-page “Beijing roadmap for the participation of APEC in the realization of FTAAP.” This is, however, like all statements, kept relatively open. Action should be taken to create a strategic study, and not the feasibility study proposed by China. In addition, this study will not be part of the APEC actions, but developed alongside. The TPP and the Regional Comprehensive Economic Partnership (RCEP) initiated by the Association of Southeast Asian Nations (ASEAN), are often understood as competing projects, now should be seen as compatible to FTAAP structures.
 
Whether the pursued objective of the FTAAP since 2006 gets a new push, as Xi mentioned in his final words at the end of the summit, is questionable, despite Chinese support. On top of the anti-corruption activities, the final APEC document also includes other euphonious initiatives such as global flow of goods, economic reforms and mutual social exchange.
 
Agreement Between China And The United States
For outsiders, is it somewhat difficult to understand how long it takes to get to a final agreement. However, the 21 countries — from China to Russia, Japan, Australia, Chile and the United States to Papua New Guinea — are such an economically different group of countries that the summit much serves as a platform for bilateral exchanges. Here the most concrete results were achieved. The United States and China announced that they have agreed in principle to an agreement to eliminate tariffs on information technology goods. However, it doesn’t mean this is a conclusion of the negotiations — this should be achieved by December. On the other hand, a solution would open the way for a new agreement inside WTO about information technology. This agreement was up-to-now not finalized because of disagreements with China.
 
What Is China’s Role?
For some time, China’s leadership has tried to take the lead in different areas of some existing, but more or less inactive, U.S. or European multilateral organizations and agreements for its ideas of a new world order. In this game, the role of China is quite inconsistent, and the results are poor. This doesn’t mean it will be this way forever. Beijing is increasingly setting the agenda, and given its economic power no one has the courage to hesitate to play a part in it.
 
All these activities seem to be a part of an orchestrated puzzle that China wants to bring together to play the role it wants to play. As the “Rupp Report: Wake Up, Western world!” stated a few weeks ago, “the global economy is probably facing its biggest transformation since the start of the industrial revolution in the 18th century.” And it seems, with a little push from China here and there, we’re getting closer to that every day.
 
November 25, 2014