‘Following the herd’ is helping keep cotton prices under wraps

‘Following the herd’ is helping keep cotton prices under wraps

According to Wikipedia, “herd mentality” describes how people are influenced by their peers to adopt certain behaviors, follow trends and purchase certain items. It gives as examples: stock market trends, superstitions, politics.

You could also include commodity markets in that list. Sometimes it works for good as when corn futures rose to $8 a bushel due to drought in the Midwest in 2012; sometimes bad as when USDA didn’t meet market expectations with its forecasts earlier this summer.

For months, the conventional wisdom has been that China’s nearly 50 million bales of reserve cotton were just waiting to be unleashed on the market. Each time cotton futures attempted to rally traders cautioned that the Chinese reserves overhanging the market would come into play.

Two months ago, the China National Cotton Exchange, acting as sales manager, began auctioning off cotton from the reserve. So far the results have been underwhelming.

CottonChina.org, a website supported by the CNCE, indicates 63,412 tons or about 290,000 bales had been sold by the end of August, according to Reuters. That’s about 3.4 percent of the total amount offered.

It doesn’t help CNCE officials that demand for cotton is down in China, which has seen the amount of polyester in its fabric blends rise significantly while the Chinese government artificially inflated the price of cotton mills could purchase.

In most countries, the seller would simply cut the price until the reserve bales began to move through the market for whatever use could be made of them. But the Chinese government, which paid the equivalent of $1.20 to $1.40 a pound for much of the fiber is loath to release the cotton at steep discounts.

The perception that some of the bloom has gone off China’s rosy economic outlook could also be having an impact on sales.

Some individuals, such as O.A. Cleveland, professor emeritus at Mississippi State University, have maintained all along that the threat of China’s reserves flooding the market has been overblown. But his ideas have frequently been dismissed as too pollyanish.

It would be tempting for Dr. Cleveland to say “I told you so” in reaction to the Reuters’ report. But those words would ring hollow if cotton futures remain depressed.

For more information on cotton fundamentals, visit http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1046.

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