Furthermore, as the 2010/11-season has shown, there is always a certain level of uncertainty when it comes to Chinese statistics. Back then inventories were greatly overestimated, which set the stage for the historic bull market that followed and maybe we are in for another statistical surprise one of these days! 

 

Just when it looked like the July contract was about to roll over, a wave of new spec buying propelled the spot month above the important 94 cents #

Take the recent yarn output numbers for example, which have averaged around 3.1 million tons per month so far this season. This number includes all types of fibers and as we all know cotton’s share has been declining significantly in recent years. Nevertheless, at 7.8 million tons of mill use in China, or 0.65 million tons a month, cotton’s share would amount to just below 20%, after taking a six percent waste factor into account.

 

Just when it looked like the July contract was about to roll over, a wave of new spec buying propelled the spot month above the important 94 cents #

By comparison, five years ago monthly yarn output amounted to 1.95 million tons per month, while annual mill use of cotton was at 9.6 million tons or 0.8 million tons a month, which resulted in a share of nearly 39%. The contrast becomes even more pronounced if we go ten years back in time, when yarn output was a mere 0.86 million tons per month and mills used 7.0 million tons of cotton or 0.58 million tons a month, which implied a 64% share. Has cotton’s share in the spinning system really dropped from 64% to 20% over the last ten years or could it be that current cotton consumption is understated? 

 

Just when it looked like the July contract was about to roll over, a wave of new spec buying propelled the spot month above the important 94 cents #

So where do we go from here? Speculators seem to have taken a renewed liking to the cotton market this week and the trend is going their way. The trade on the other hand still struggles with its short position and time is starting to become a factor. So far most traders have kept their cool, but we are not sure that will remain the case if the market continues to push higher. There are still over 3.0 million bales in unfixed on-call sales on July and merchants need to get out of basis-long positions, which are getting worse by the week. This set-up makes the market vulnerable to an explosive move to the upside!

 

Just when it looked like the July contract was about to roll over, a wave of new spec buying propelled the spot month above the important 94 cents #

We still like December and feel that it has the potential to move into the high-80s, supported by the strength in the spot month, an empty pipeline in the third quarter and a worrisome drought in West Texas.

 

Just when it looked like the July contract was about to roll over, a wave of new spec buying propelled the spot month above the important 94 cents #