NY cotton market facing downward trend

24 Sep '11

4 min read

So far none of the reserve auctions have been successful in procuring cotton, because cash prices for the arriving crop are still above the support price of 19'800 yuan/ton. Eventually this domestic support in China, which translates to slightly over 140 cents/lb, should help international cotton prices as well, because it will lead to increased import demand if the price gap to foreign cotton becomes too wide.

So where do we go from here? After a failed breakout attempt, the market has moved back into familiar territory and there is good reason to assume that it will remain stuck in a sideways trend for quite a while. Even though global cotton production is likely going to surpass mill demand this season, the Chinese Reserve will be there as a backstop and absorb excess inventory, which should mitigate bearish forces. Also, despite the current jitters in the financial markets, we are not likely to see a repeat of the de-leveraging panic we saw in 2008, because hedge funds carry much smaller positions than three years ago and are generally better prepared to face volatile conditions.

As far as upside potential is concerned, the window for something to go wrong with the Northern Hemisphere crops is slowly but surely closing, which takes away the weather premium. Once the crop is in, it will be difficult to find a trigger to rally the market, unless demand were to exceed current expectations, which is not likely given the subdued economic outlook.

Plexus Cotton Limited

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