NY cotton futures give up additional ground

Spec liquidation and a lack of trade buying continued to depress values this week, with July settling right at an important 5-month uptrend line today. According to the latest CFTC report, which contains futures and options positions, speculators large and small liquidated about 3.6 million bales in the four weeks between March 19 and April 16, and the exodus carried on this week.

Spec liquidation in cotton seems to be related to weakness in other commodities, such as the Ag sector or precious metals, as the exuberant mood that prevailed among many fund managers until recently has given way to a much more cautious approach.

However, while the technical pictures looks disconcerting at the moment, today’s excellent US export sales report reminded traders that the market may not be quite as gloomy as it currently feels. Net new sales for the current marketing year (April to July shipment) amounted to 245’000 running bales of Upland and Pima cotton, with another 32’900 running bales sold for shipment August onwards. Exports were stellar as well, as no less than 350’700 running bales were shipped last week! Total commitments for the current season now amount to 12.7 million statistical bales, whereof 9.6 million have already been exported.

The fact that China bought 203’600 running bales of US Upland and Pima cotton and received 178’800 running bales in shipments last week should be seen as supportive by the market. China continues to absorb cotton and yarn from the rest of the world at a torrid pace and we don’t think that the market fully appreciates the magnitude of these imports.

Over the last 20 months China has imported just under 40 million bales of raw cotton, or an average of about 2 million bales a month! In addition to that, China has taken in an ever-increasing amount of yarn, with the just released March figures showing that a record 172’000 tons were imported last month alone. For the first quarter of 2013, Chinese yarn imports of 443’000 tons are running around 51 percent ahead of last year, with India and Pakistan supplying the bulk of it.

We estimate that the US has currently only about 2.8 million bales (including the certified stock) left for sale, assuming that shippers are reserving around 1.8 million bales out of existing stocks to supply domestic and foreign mills between August and October.

Therefore, if the US were to sell 150’000 bales a week, it would take about 4 months to completely sell out and at 200’000 bales a week stocks would be gone by the end of July! Typically, when inventories are running that low, prices tend to rise in order to ration demand, but we are currently seeing the exact opposite, with a falling futures market enticing mills to buy more.