NY cotton market under pressure

12 Aug '11

6 min read

The USDA foresees global ending stocks to climb to 52.7 million bales by the end of the 2011/12-season, which compares to 44.3 and 45.0 million bales in the previous two seasons. While that would still be less than the 60 to 62 million bales in ending stocks we have had between 2004/05 and 2008/09, it is definitely signaling to mills that there will be enough cotton to chose from next season and that there is no reason to chase prices.

However, we still believe that it will take a while until the cotton pipeline will be flush with new crop arrivals, especially in the US, since old crop inventory will be gone by November. For this reason we feel it is dangerous to be short December at these prices, because we could easily see the inversion between December and later months flare up again.

It was a testy week for the world's financial markets, after the S&P downgraded US debt right when the market was most vulnerable. Combined with the problems in Europe and fears of a global recession, it caused investors to flee out of stocks and commodities into bonds and gold, with stock portfolios around the globe taking a big hit. The mini-panic was finally stemmed by the ECB pumping liquidity into the system and the Fed promising to keep interest rates near zero (which means negative real interest rates) for the next two years. While these measures have calmed investors' nerves for now, they are no solution to the growing fiscal, monetary and social problems the US and Europe are confronted with. Inflating the problem away seems to be the only tool left for central bankers, since letting the economy collapse is not an acceptable option.

So where do we go from here? With grain prices rallying and global stock markets regaining their footing, we believe that December futures should find decent support near the 93 cents level. The physical market is becoming more active as well, as mill enquiries are now coming from a number of markets, after it has been mainly China who did the heavy lifting in recent weeks. While we see value at current levels, we don't see prices run away to the upside anytime soon, because the improved statistical picture should prevent a repeat of the dynamics we saw last season, unless we have some major crop issues over the next couple of months or demand strengthens beyond current expectations. The most likely scenario is therefore a continuation of a trading range between 90 and 110 cents.

Plexus Cotton Limited

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