NY cotton futures start surging

11 Nov '11

5 min read

Plexus Cotton Limited reports that NY futures moved slightly higher this week, as December gained 138 points to close at 99.50 cents.

After struggling through another slow week with little demand in most consuming markets, traders woke up to an unexpectedly large US export sales report this morning, with net sales of Upland and Pima cotton totaling 999'900 running bales for the current marketing year and 24'900 running bales for the 2012/13-season. If our records are correct, it was the largest weekly sales report since October 2003! Once again it was China that dominated the action by taking 997'000 running bales net, while the remaining markets saw only a marginal increase overall, as new sales of 44'900 running bales were offset by cancellations of 41'900 running bales.

US export commitments for the current marketing year now stand at 8.9 million statistical bales, of which 0.8 million were sold under 'optional origin'. This means that sales have already reached around 79% of the latest USDA export projection of 11.3 million bales. However, shipments are still lagging considerably behind at just 1.35 million statistical bales for the season, which tempers the optimism that could otherwise be construed from this stellar pace of US sales.

Apart from apparently becoming active in the international market as well, the Chinese Reserve continued to absorb domestic cotton at a brisk pace this week by taking up another 750'000 statistical bales, bringing the total to about 1.75 million bales since mid-October. This determined action leaves little doubt that China has embarked on a mission to bolster its strategic stockpile and to support prices paid to farmers.

The cotton market has some similarities to the bond market, where the Federal Reserve and its 'zombie banking system' have been countering bearish fundamentals by absorbing treasuries into their balance sheets. Fighting the Fed is fruitless, as many bond traders who have shorted treasuries this year have found out, and it may be equally dangerous for bearish cotton traders to fight the Chinese government as long as it remains on its current buying spree. After today there are probably not too many traders left who doubt the effectiveness of the "Chinese put".

While the downside seems to be limited, what would it take for the market to move higher? Apart from Chinese support there is unfortunately not a lot of positive news to report at the moment, as most mills are still singing the blues and the yarn market remains listless. The shift from cotton to man-made fibers has taken a toll on consumption and cotton has its work cut out to regain lost ground. The most recent statistics on yarn and fabric output in China reflect this shift away from cotton. According to the National Bureau of Statistics (NBS), total yarn output in China was up 16.3% year-on-year in October, while cotton fabric production was down 7.5% year-on-year, confirming that man-made fibers have been displacing cotton.

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