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NY Cotton Futures continue to tumble this week
30
May '14
Futures prices continued to tumble this week, as negative fundamental and technical factors exerted additional downward pressure on the market. Abundant rainfall in West Texas over the Memorial Day weekend could potentially add 1.5-2.0 million bales to the ROW (rest-of-the world) balance sheet, which would help to alleviate the tight stock situation outside China in the coming season. 
 
This bearish fundamental development exacerbated an already weak technical trend, which saw July drop from a high of 94.74 on May 6 to a low of 83.86 cents on May 28, before rebounding somewhat over the last two sessions. December fared only slightly better, as it dropped from a high of 84.58 to a low of 77.00 cents before regaining its footing. 
 
Even though open interest in July futures remains stubbornly high at 102’092 contracts, there seem to be a lot of offsetting options positions according to the latest ‘Commitment of Traders’ report by the CFTC, suggesting that there has been plenty of liquidation in recent weeks. According to this data, the trade was just 4.7 million bales net short in the spot month on May 20, down from 6.8 million bales two weeks earlier, and this latest round of liquidation has likely reduced this position further.
 
Over the last three seasons the difference between the ROW production surplus and Chinese imports has been the main driver behind international cotton prices. This symbiotic relationship has worked rather well until now, as China has been willing to absorb all excess bales from the ROW, which in turn has kept ROW inventories fairly stable. As a result, ROW stocks have fluctuated in a relatively narrow range between 38.3 and 42.4 million bales for the last four seasons, with the current season representing the low mark. 
 
Since the ROW production surplus has been steadily dropping over the last three seasons, declining from 27.8 million bales in 2011/12 to just 11.25 million bales in the current season, a corresponding drop in Chinese imports from 24.5 million bales in 2011/12 to an estimated 13.5 million bales this season didn’t have a negative impact on prices so far.
 
The market’s great fear is, once again, that China will no longer be able or willing to absorb the ROW surplus. This is nothing new, as analysts have been predicting rising ROW stocks and falling prices in each of the previous three seasons, only to be proven wrong by the strength of Chinese imports year after year. Nevertheless, with China shifting its policy from a high minimum support price mechanism to a target-deficiency payment, which leaves Chinese domestic prices exposed to market forces next season, there is definitely more reason for concern. 


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