For 2013/14, the USDA predicts the ROW to produce 8.99 million bales more than it consumes, down from a surplus of 13.87 million bales in the current season.
Although Chinese imports are expected to be quite a bit lower next season at 11.0 million bales, they are nevertheless 2.01 million bales larger than the production surplus outside China, which adjusted for some other changes means that ROW stocks are expected to fall to just 33.56 million bales by the end of July 2014. This would be the second lowest inventory in ten seasons, after 32.41 million in 2009/10.
US export sales continued to surprise positively, as a combined 201’900 running bales net were sold for both marketing years, with 15 markets participating in the buying. Total commitments for the current season now stand at 13.7 million statistical bales, whereof 11.8 million have already been shipped.
In addition to that there are currently 2.0 million bales in export commitments for shipment August onwards. According to our calculations the unsold inventory is now less than a million bales, not counting the certified stock of a little over half a million bales. This means that export sales will likely drop off considerably over the coming weeks, not because there isn’t any buying interest, but because there won’t be much cotton on offer anymore.
So where do we go from here? The fate of the July contract depends to a large degree on how the remaining open interest gets dealt with. The odds favor a short squeeze and a continuation of the rally as we head towards First Notice Day. Once most of the shorts are out, there may be a last minute selloff when the futures market reconciles with cash values.
New crop has been pulled up by July, but the tightening statistical picture in the ROW is providing strong underlying support for December in the low to mid-80s. As long as China continues to reduce supplies in the ROW, prices are likely to stay on a firm footing.
Traders are aware that at some point in the future these massive Chinese stocks will come back into picture and are therefore reluctant to get too friendly on prices going forward. But until China changes its current modus operandi, the market will likely continue to climb the proverbial "Chinese Wall of worry”.
Plexus Cotton Limited