Although a larger than expected US crop would certainly help to improve the tight ROW balance sheet, world prices will primarily be determined by how much China decides to import next season. At the current pace of Chinese imports (2 million bales a month), an extra million bales in Texas equates to just two weeks of Chinese buying.

If imports were to slow down to just one million bales a month next season, as predicted by the USDA, it would stretch it out to four weeks. Nevertheless, we feel that the market is putting too much emphasis on whether Texas will grow an extra million bales or two next season, when it should be focusing on China, who has been dominating the scene by importing well over 40 million bales over the last two seasons!

So where do we go from here? The short-term outlook is bearish, both from a technical as well as a fundamental point of view and the market will have to trade to a level at which it uncovers a decent amount of physical demand. We feel that this should be the case in the 78-80 cents area basis July. In the longer run the market outlook still largely depends on the actions by China.

All indications are that China will continue to import in the foreseeable future and with the futures market once again near 80 cents, we should see increased demand from China as buyers outside the quota system (paying the 40% duty) will become active again. Only once China finally steps on the breaks will the market feel sustained pressure, but most analysts don’t expect to see a major policy shift until early next year.

Plexus Cotton Limited