NY cotton futures pulls back this week

22 Feb '14

6 min read

Unfixed on-call sales in current crop are nearly 2.0 million bales larger than the 3.5 million bales of last year. What this boils down to is that there are a lot more bales to fix in a much less liquid market and this could spell trouble! For now it is quiet on that front, because mills have just escaped from March to May, but sooner or later they will run out of opportunities to roll their way out of harm’s way.

Based on how limited remaining supplies are on a global basis and how much mills still need to cover until new crop, we have to assume that global mill use is a lot stronger than the statistics give it credit for. Currently the USDA estimates ROW stocks at 39.2 million bales at the end of July, slightly higher than the 38.8 million bales of last season.

This is at the higher end of a ten-year range and should comfortably tie mills over to new crop, yet for some reason supplies feel a lot tighter than they should.

In trying to come up with a logical explanation, we suspect that the statistics may not have fully captured the extra demand that has arisen from a) Chinese mills setting up shop in other Asian markets and b) the large increase in yarn exports to China. For example, while statistics may have correctly lowered mill use in China as mills have shifted production elsewhere, they may not have properly accounted for the corresponding increase in these other markets.

Likewise, with India currently exporting the equivalent of around 7 million statistical bales of yarn an annual basis, or about 25% more than a year ago, we feel that this increase may not yet be properly reflected in the balance sheet.

The strength of Chinese cotton and yarn imports continues to surprise traders and is definitely one of the main engines behind this strong market. In January China imported another 292’485 tons of cotton, bringing the total for the first six months of the season to just under 1.7 million tons or 7.8 million statistical bales.

This means that China will have to take in only another 3.2 million bales over the next six months in order to reach the USDA estimate of 11.0 million bales.

Equally impressive is the strong pace of Chinese yarn imports (consisting of yarn containing at least 85% cotton), which in January amounted to 166’277 tons and over the last twelve month has grown to nearly 2.0 million tons or the equivalent of around 9.7 million statistical bales if we allow for a waste factor of six percent. This means that over the last two seasons yarn imports to China have just about doubled!

So where do we go from here? After posting two-year highs in May and July earlier this week, the market has started to pull back. At the moment this is still nothing more than a correction, but we need to watch out for a potential breach of the 3-month uptrend line dating back to November, which currently runs through around 87.10 in May.

A break below would likely trigger sell-stops and flush out some spec longs, although trade buying would readily absorb any selling in the 83-85 cents area.

In the longer term there are still a lot of fixations to be done and shorts to be bought back in May and July, and in the absence of any major spec liquidation it could prove difficult for these shorts to escape unscathed. It would therefore be premature to call an end to this bull run!

Plexus Cotton

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