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NY cotton future ends lower due to unexpected export ban
Mar '12
Plexus Cotton Limited reported that New York (NY) futures continued to tread water this week, as May was down 11 points to close at 89.56 cents, while December gained 41 points to close at 91.29 cents.

Despite a short-lived flash in the pan in reaction to the unexpected export ban in India, the market was unable to generate any sustained momentum in either direction, as near-term supportive forces continued to keep a longer-term bearish outlook in check.

The US export sales report of this morning was constructive, as 117'900 running bales net were added to this season's tally, while another 20'900 running bales net were booked for next marketing year.

This brings current crop commitments to 11.4 million statistical bales, not counting some 1.5 million in optional sales. So far 5.7 million bales have been shipped, which is exactly half of existing commitments. Last week's shipments of 392'800 running bales were a marketing year high and the current pace of exports remains well ahead of the 240'000 running bales needed to get to the USDA estimate of 11.0 million statistical bales.

What's encouraging about the last few export sales reports is that net sales kept increasing at a surprisingly strong rate despite the fact that only 3.3 million statistical bales of US cotton remain uncommitted at this point.

Availability looks even tighter if we consider that domestic mills will need about 0.9 million bales for August to October deliveries and that there are 1.5 million in optional sales that could potentially come out of this remaining pool of cotton.

There is of course always the possibility that cancellations may free up some of the 5.7 million bales that remain unshipped at this point, but with shipments going out as fast as they are week after week, the fear of cancellations seems to be a lot less prevalent than it was a couple of months ago.

Earlier this week India blindsided the cotton world by putting an immediate ban on all cotton exports. It was estimated that as of March 5 India had already exported around 9.4 million local bales, with registrations of another 3 million bales pending. The textile lobby apparently fears that stocks would get too tight if 12 million bales were allowed to leave the country, much to the dismay of farmers, who have seen prices for their seed cotton tumble this week.

Given the recent upward revision in beginning stocks and weaker than expected mill use, we feel that India still has plenty of cotton left and that this kneejerk reaction was therefore unwarranted. We probably haven't heard the last of it and additional exports may still be allowed once the dust settles and cooler heads prevail.

This is not the first time that India has banned exports on short notice. Last time it did so was in 2010 and in doing so it helped fuel a runaway bull market. Fortunately this is not the case this time around, because unlike in 2010, global stocks are plentiful and textile demand is still relatively slow. Nevertheless, the market managed to lock limit up on Monday and synthetic values were as much as 600 points higher than on Friday.

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