NY futures bounce back strongly

12 Apr '08

4 min read

So far we have been assuming that foreign cotton production is going to remain stable, but we are no longer sure that these runaway food prices won't sway some farmers to plant food crops instead. Half of the world's rice production is located in China and India and with rice prices up 50% since January alone, we could very well see some cotton fields turn into rice paddies.

Apart from these outside events, the cotton market has found some strength of its own, as US export sales amounted to an impressive 493'600 running bales for the week ending April 3rd, with shipments improving to 299'500 running bales. For the season, total commitments now tally 12.3 mio statistical bales, of which 8.5 mio have so far been shipped.

The market was particularly pleased to see China back in the market with more than 290'000 bales. Since other origins are already well committed, the US is now the main supplier of exports for the remainder of the season and we are therefore confident that the current export projection of 14.5 mio bales will be reached or surpassed.

So where do we go from here? The old adage to "never short a dull market" proofed to be right. Over the last couple of weeks outright volume had dropped to a trickle and there was simply not enough momentum to push values through trend support near 69/70 cents. It was therefore only a matter of time until the market would try the other direction again.

However, before we get too excited about this advance we need to see further evidence that this was not just another 'dead cat bounce'. Volume has been lackluster so far and we have yet to see any noticeable increase in open interest. Both are needed to validate this new uptrend.

However, some of the technical measures are beginning to improve and this may get speculators to commit to new longs and/or cover shorts, which may inject the market with some much needed momentum. A crossover of the 7-day/21-day exponential moving averages looks imminent and this trusty indicator usually portends and extended move ahead.

Even though the fundamental picture has improved thanks to improved export offtake and strong outside markets, there may be some speed bumps ahead as we approach the notice period with a record certificated stock of over 1 mio bales. It will be interesting to see how this big inventory will be dealt with.

The longer term picture still looks quite friendly in our opinion, as lower plantings, strong competing crops, a weak US dollar and the threat of inflation all point to higher prices.

Plexus Cotton Limited

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