Thursday, January 3, 2013

Chinese Hoarding May Explain Cotton Market Mysteries

Probably the commodity most attractive to manipulators. And which manipulation is fervently denied by all and sundry.
As a very large player, William Clayton, accused of manipulation by the President of the New York Cotton Exchange, testified at the 1928 Senate Ag Committee hearings on the cotton market:
...“The word „manipulation‟ . . . in its use is so broad as to include any operation of the cotton market that does not suit the gentleman who is speaking at the moment.”...
More recently, in June Glencore's former head of cotton trading, fired for his losses, sued Louis Dreyfus Commodities for manipulation. Thompson Reuters editorialized:
...While other companies and traders were also said to have been caught up in the squeeze - including rival merchant Noble Group - it is unclear whether potential counterparties and customers of Louis Dreyfus will risk their standing in the clubby cotton market by joining the suit....
And speaking of clubbiness, in 2008 cotton futures prices at expiration failed to converge with spot, pretty much the definition of manipulation, but which the CFTC said was okey-dokey by them.
 From Agrimoney:
China alone explains why cotton prices have not fallen to an all-time low, and indeed are proving surprisingly involatile, and why production has continued to drive a build-up in world stocks of the fibre.
"The significant features of the cotton industry at the start of 2013 are those that are not happening," the International Cotton Advisory Committee said.

These include a dearth of price volatility, with the gap between market highs and lows, typically 34% over average Cotlook A physical prices over a full season, running at 9% in the first give months of 2012-13.

There has also be a lack of a production response to huge supplies, with output set to remain some 10% above consumption in 2012-13 – lifting stocks to the equivalent of 70% of consumption, the highest figure since the end of World War II.

Price anomaly

"Accordingly, prices might be expected to be record low," the ICAC, an intergovernmental group, said.

The stocks-to-use ratio is a key pricing metric, indicating the looseness of supplies and thereby the level of competition needed among buyers.

"However, the Cotlook A index has averaged 83 cents per pound so far this season, well above the long-term average of 69 cents per pound."

State hoarding

Stockpiling by the China of some 9m tonnes of cotton for state reserves - which began in 2011-12 and will continue through March of this year - explains the anomalies, the committee said.

"More than 10m tonnes could be in the reserve by that time.

"With 25% of 2012-13 global cotton supplies being held away from commercial channels, prices have not dropped further....MORE
Just think about all the weird price signals this is sending the market: buyers are afraid they'll go long and China will dump the hoard. Futures sellers are afraid to go short, thinking they'll get absorbed by the borg.
That is market power.