Over the last 3 seasons Chinese ending stocks have gone from 10.6 to 58.8 million bales, for an increase of 48.2 million bales. During that same time frame ROW stocks have gone in the opposite direction, dropping by 1.7 million bales, from 39.8 to 38.1 million bales. 

 

After closing at a 26-month high of 94.75 cents earlier this week, the July contract wasn't able to maintain enough upside momentum to keep this #

The coming season is expected to bring some relief to the tight ROW stock situation, but it may not be as much as some of the bears are counting on. Let’s assume that world production were to surpass mill use by about 3.0 million bales and let’s further assume that China had a production deficit of 8.0 million bales. This would result in a ROW production surplus of 11.0 million bales. If Chinese imports were to remain stronger than expected next season, let’s say at 9.0 million bales, then ROW ending stocks would increase by merely 2.0 million bales to 40.1 million bales. 

 

After closing at a 26-month high of 94.75 cents earlier this week, the July contract wasn't able to maintain enough upside momentum to keep this #

While this would offer some improvement, we don’t think that it would be enough to depress prices in any meaningful way. For that to happen we would either need to see above average ROW production, lower mill use or fewer Chinese import, or a combination of the three. However, the way it looks at the moment there are plenty of issues on the production side (Texas, Australia, Indian monsoon), while China doesn’t seem to shut its door to imports anytime soon.

 

After closing at a 26-month high of 94.75 cents earlier this week, the July contract wasn't able to maintain enough upside momentum to keep this #

So where do we go from here? Tomorrow’s USDA report will obviously give traders something to talk about, but we need to remember that the government doesn’t have a crystal ball either and is guessing like the rest of us. There is no denying that the current supply/demand picture is extremely tight and this will likely remain the case until new crop cotton starts to fill up the pipeline between November and February. 

 

After closing at a 26-month high of 94.75 cents earlier this week, the July contract wasn't able to maintain enough upside momentum to keep this #

With the forward A-index closing the gap to the spot quote (91.25 versus 93.80 cents), cash prices seem to be well supported through the early part of next season, which should keep the futures market on a relatively firm footing. Sure, one could argue that July futures are currently about 3-4 cents overvalued compared to theoretical cash values, but with available US supplies down to the last million bales and with premium machine-picked cotton getting scare, this premium may be justified. Having said that, we have no firm opinion on July and prefer to stay out of it!

 

After closing at a 26-month high of 94.75 cents earlier this week, the July contract wasn't able to maintain enough upside momentum to keep this #

However, we still like December, which at a nearly 800-point discount to the forward A-index looks attractive, especially if the drought in West Texas continues.

 

After closing at a 26-month high of 94.75 cents earlier this week, the July contract wasn't able to maintain enough upside momentum to keep this #