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NY cotton futures continues to trade sideways
12
Jan '13
Spot futures are still gravitating towards the 75 cents level and for the past eight sessions the March contract has settled within a very narrow band of less than 100 points, between 74.79 and 75.71 cents/lb.

There have been a few intraday spikes up and down, but last Friday’s selloff below 74 cents found ready buyers, while attempts to propel the market beyond the crucial 78 cents resistance area have so far lacked the necessary momentum.

The current level of NY futures actually makes sense when compared to where physical prices are trading, which is in the 83 to 86 cents/lb range, basis Far East main ports. Demand has remained relatively brisk, as mills outside China are currently able to operate with decent profit margins.

The latest US export sales report confirmed this encouraging pace of business, as there were once again over 200’000 bales of Upland and Pima cotton sold to 18 different markets last week. Shipments finally picked up as well, as more than 270’000 bales were exported last week. Commitments for the current marketing year now amount to nearly 9.6 million statistical bales, whereof some 3.8 million have so far been shipped.

Considering that total supply of US cotton amounts to around 20.6 million statistical bales this season and with export commitments/domestic mill use already at 13.1 million bales, there are just 7.5 million bales left for sale. If we do the calculation for Upland cotton only, the number is just around 7.0 million bales. Therefore, with only about a third of the supply left for sale and with next season’s crop expected to be a lot smaller, we don’t foresee any price pressure on US cotton for the remainder of this season.

To the contrary, the longer we stay at the current price level, the faster some of these sought-after US qualities are likely to sell out, since there isn’t really that much competition from other origins around the globe at these prices.

We have already stated ad nauseam that the 45 million bales of Chinese stocks, which are priced at 55-70 cents above the world market, don’t pose a threat and won’t be able to prevent international prices from rising by 10 or 15 cents.

We feel that this Chinese “vacuum effect” is still not fully recognized by traders, since a lot of analysts continue to see Chinese stocks as a bearish influence on international prices, especially now that the Chinese government intends to release some of its stockpile. However, by stifling its export-oriented textile industry with prohibitively high prices, China has allowed textile production to shift to other areas around the globe, which is leading to higher mill use in many markets.

This trend has yet to be properly reflected in the statistical data! Also, as long as China leaves its doors open to imports be it in the form of raw cotton or yarn, it will help to underpin international prices. In other words, while China is struggling to find ways to deal with the expensive noose around its neck, there simply won’t be enough 75 cents cotton available to satisfy demand for too much longer!

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