NY Cotton Futures continue to head southwards

23 May '14

5 min read

The other positive surprise was stellar US export sales report, which showed net new sales of 518’400 running bales, of which 360’000 bales were for nearby shipment (May/July). What’s remarkable is that there were 18 markets pursuing US cotton, with China once again taking the lion’s share at 269’300 running bales. For the current season we now have commitments at 10.6 million statistical bales, whereof8.9 million have already been exported.

This report was nothing short of astonishing, because it came at a time when available US supplies were already below a million bales according to our calculations. The US started the season with total supply of 16.8 million statistical bales, of which 10.6 million have been committed for export so far and 3.6 million are going to be used up by domestic mills by the end of July.

This leaves 2.6 million bales, from which we have to deduct 0.9 million bales for domestic mill use from August to October, and we further assume that around 1.0 million bales in export commitments for next marketing year (out of a total of 1.9 million bales) will be shipped from existing stocks. This would leave just 0.7 million bales available for sale.

In view of this small amount of uncommitted cotton we doubt that all of the current certified stock of around 430’000 is still available. Instead we believe that most of this certified cotton has already been sold and will eventually be applied for shipment, but in the meantime it serves its intended purpose as a deterrent, keeping spec longs at bay.

So where do we go from here? The slow moving upper level low, which is moving in from the west coast, is likely to produce copious amounts of rain and hail in West Texas over the Memorial Day weekend. Although this event is highly anticipated by the market and may therefore already be discounted to a large degree, we could still see some more downward pressure when traders return from the long weekend next Tuesday and see rainfall totals.

The chart still points to lower prices as well, although momentum indicators are in oversold territory and some caution is therefore warranted. What’s needed in order to halt the decline is for buyers to emerge in support of the market and the most likely source of support is the cash market.

Let’s not forget that physical supplies will remain extremely tight until at least November and with China being more active on the import front than anticipated, there should be plenty of support underneath the market. While July is hard to read as it heads into liquidation, we still believe that December near 80 cents represents great value when compared to C&F Far East prices near 90 cents.

Plexus Cotton Limited

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