China's Change In Cotton Policy Could Have Unintended Consequences

January 23, 2014 12:20 AM
 

What Traders are Talking About:

Overnight highlights: As of 6:15 a.m. CT, corn futures are trading 1 to 2 cents higher, soybeans are mostly 1 to 3 cents higher and wheat futures are 4 to 6 cents higher. The challenge for bulls will be to maintain the price strength through the daytime hours. Cattle futures are called higher as they play catchup to the cash market. Hog futures are expected to open mostly weaker.

 

* Change in cotton policy may have unintended consequences. China will scrap its cotton stockpiling program, where the government buys cotton from farmers at a set price, in favor of direct farmer subsidies this year. But the China Cotton Association fears the policy change may cause some cotton producers to further reduce plantings, which have been declining and were already expected to drop more than 9% this year. The reason: The farmer subsidy program is currently only planned in the top cotton production province of Xinjiang, which produced roughly 55% of the country's cotton crop last year. Gao Fang, secretary general of the China Cotton Association (CCA) told Reuters, "We have already estimated that acreage (this year) will drop a lot. So now if you release a policy, and it doesn't take into account the inland provinces, the drop in acreage will be very big, Just because they are trialling subsidies in Xinjiang, doesn't mean the government should give up on the inland provinces."

The long and short of it: Much of the focus in the cotton market has been on how China's policy change will impact the sale of massive state cotton reserves, and therefore, demand. But the policy change could also have an impact on Chinese production.

* China's manufacturing sector contracts. Preliminary data from HSBC signals China's manufacturing sector contracted for the first time in six months this month. HSBC's flash purchasing managers index (PMI) dropped to 49.6 from a final reading of 50.5 in December. New export orders are down this month, but HSBC says slowed domestic demand is the primary reason for the contracting factory output. This now puts more focus on the official PMI reading that will be released in early February. HSBC surveys smaller manufacturers, while the official PMI survey conducted by the Chinese government focuses more on larger manufacturers. Even if the official PMI data doesn't signal contraction, there's little doubt factory activity is slowing.

The long and short of it: The preliminary PMI data signals China's manufacturing sector is cooling, which is a concern and signals China faces hurdles in keeping economic growth from slowing further this year.

* Record December pork stocks. USDA's Cold Storage Report on Wednesday showed beef stocks were less than expected, while pork stocks topped expectations and were record-large for December. Beef stocks in frozen storage on Dec. 31 totaled 438.123 million lbs., which was around 13.3 million lbs. less than the average trade guess of 451.4 million pounds. Beef stocks declined 12.6 million lbs. from November and came in 27.6 million lbs. less than December 2012. The drawdown in beef stocks came amid tight market-ready cattle supplies, but also suggests demand to close out last year wasn't hurt by rising beef prices. Pork stocks at the end of December totaled 557.130 million lbs., which was around 8.9 million lbs. more than anticipated. Pork stocks rose 10.9 million lbs. from November and 5.6 million lbs. from year-ago as belly stocks surged. Total poultry stocks came in at 913.665 million lbs., which was down 32.4 million lbs. from November and 61.6 million lbs. less than year-ago. Given high beef prices last month (record-high now), demand for poultry is rising.

The long and short of it: The meat stocks data reflects tight cattle slaughter supplies and record hog carcass weights. Beef stocks will continue to tighten unless record prices dramatically slow consumption. Pork stocks are expected to tighten down the road, in part due to impacts from PEDV.

 

Follow me on Twitter: @BGrete


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