NY cotton futures climb higher this week

28 Apr '12

6 min read

Plexus Cotton Limited reported that New York (NY) futures added to their gains this week, as July advanced 139 points to close at 92.11 cents, while December improved by 76 points to close at 89.07 cents.

After three consecutive weeks of negative net US exports sales, fears of additional cancellations were eased this morning after the latest report revealed an increase in net sales of 149'100 running bales of Upland and Pima for the current marketing year and 56'000 running bales for 2012/13.

It was encouraging to have China back as a net buyer, with a total of 113'800 running bales between the two crop years. As in weeks past, the buying continued to be broad-based, as no less than 14 markets were buying US Upland last week. Total commitments are now back at 12.0 million statistical bales for the current marketing year, whereof a little less than 8.1 million statistical bales have so far been shipped.

Today's US export sales report was of psychological importance to the market. Not only did it put a stop to the recent string of cancellations, but it also showed that China is still a keen buyer if the price is right. What remains a mystery is how much quota is still unused.

By some estimates it amounts to less than 200'000 tons, although there were rumors this week that the Chinese government may issue a supplemental quota of 1.0 million tons some time in May, probably after growers have made their planting decisions. This additional quota may be tied to the release of Reserve Stocks, whereas one unit of imported cotton would have to be matched by buying one unit of Reserve cotton.

Imports are still very attractive in China at current international prices when compared to domestic cotton. In fact, local traders have been paying over RMB 3'000/ton (over 20 cents/lb) to acquire import quotas and are apparently still able to make a decent profit on it.

Even though the Reserve has recently suspended its auction purchases until new crop, it has siphoned off over 3.13 million tons (14.4 million bales) of domestic cotton this season, which has led to an artificially tight local market and kept prices well supported. The China Cotton Index has been hovering just north and south of 140 cents since last July!

Although Chinese imports are expected to rise to a record 20.5 million bales this season, they still amount to only about half of Chinese mill use, which is currently pegged at 42.5 million bales. Therefore, as long as this huge price gap between China and the rest of the world exists and as long as there are quotas available, imports will continue unabated.

We believe that the many shorts in July are playing a dangerous game, because they are to a large degree depending on what the Chinese government decides to do next. If China continues to sit on its reserves for the foreseeable future and instead allows additional imports to supply the local market, then a short squeeze becomes a possibility.

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