NY Cotton Futures shows relentless decline last week

The certified stock has been rapidly depleting, currently amounting to just 136’000 bales, and based on today’s futures price it would not be possible to profitably replenish this inventory. The narrowing of the Dec/March spread to just 64 points today seems to recognize this fact! What this is telling us is that while the bear market may have further to go, there could be a bottleneck early on that forces December to appreciate relative to March, May and July. In other words, the bear market may have to take a breather in the fourth quarter before the floodgates open again in early 2015.

Although China and its massive Reserve stocks are the main reason behind this bear market, there have been a few rumors lately that could alter the market’s perception in regards to Chinese imports.

According to some sources China may contemplate to allow imports at a 4:1 or 3:1 ratio against the purchase of Xinjiang new crop cotton and not resume further Reserve auctions until later in the season. If such a measure was passed, it could lead to more imports than currently anticipated by the market, which would be supportive to prices.

According to some estimates, China may still have some 3.5 to 4.0 million bales in unused import quotas at this point, most of which need to be imported before the end of December. If true, US cotton would be well positioned to capture a big share of this import demand, especially at current prices, as competitors like India and West Africa may either not be ready to meet the required shipping months or are not as competitive.

US export sales for the week ending July 24 amounted to a decent 260’400 running bales net, with 17 markets participating. China moved back into the top spot by taking 104’900 running bales, followed by Pakistan with 66’900 running bales.

Shipments of 120’600 running bales were right at the pace needed to make the current USDA estimate of 10.5 million bales. With the 2013/14 marketing year ending today, we estimate that around 600’000 bales will be carried over and added to 2014/15 commitments, which should therefore rise to around 4.4 million statistical bales, plus whatever has been sold this week. So where do we go from here? Looking at the chart there is nothing that would tell us that this wave of selling is about to end.

The bulls’ main hope therefore rests with the cash market, as producers may increasingly resist selling their cotton at these depressed levels, which could eventually translate into support for the futures market. However, since the next major delivery period is still nearly four months away, there is no immediate reality check for the futures market, which means that values could easily overshoot to the downside if the current selling panic continues.

Plexus Cotton limited