When we look at the statistical position of the US, we have total supplies at an estimated 17.6 million bales (3.9 beginning stocks and 13.7 million crop), whereof 5.5 million have so far been sold for export and 3.5 million are going to be used domestically.
This leaves some 8.6 million bales uncommitted and if we were to project ending stocks at 3.8 million bales by the end of July, then the US would have to sell an additional 4.8 million statistical bales for export and ship 8.4 million bales. That’s certainly possible, but competition from India, West Africa, Greece, Central Asia, Brazil and Australia is likely going to be stiff!
Although the Certified Stock has risen to nearly 220’000 bales, including bales awaiting review, the Dec/March spread started to narrow once the market was trading below 76 cents. That seems to be the level at which certified cotton becomes interesting for potential takers and it also makes it difficult to ship new crop cotton profitably to the board. December shorts therefore need to be careful not to get caught in a trap!
So where do we go from here? The market has found some support this week, but whether this is just a temporary stop on the way to lower prices or something more meaningful remains to be seen.
USDA report will likely determine the market’s next move! The market seems to have already ‘discounted’ a bearish report and we therefore need to brace ourselves for a bullish surprise. This could come in the form of a long overdue adjustment in the Chinese stock numbers to reflect the more realistic US attaché findings.
There have been a lot of rumors lately in regards to China’s upcoming reserve sales, which have contributed to the market’s bearish mood. Although the reserve sales policy is certainly important, we need to be careful not to overplay its role in the price discovery process. As far as international prices are concerned, the formula remains fairly simple: ROW (rest of the world) surplus minus Chinese imports = change in ROW stocks.
Plexus