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Cotton acreage shrinks further
21 Jun '08
6 min read
We believe that these dynamics are responsible for the excessive upside moves we have seen in crude oil, grains and some of the other commodity markets that have bullish fundamentals. It really boils down to a lack of short sellers and with open interest rising so much in recent years, it takes an ever increasing amount of shorts to offset the huge block of these 'long only' index funds.
The question in regards to cotton is whether the supply/demand situation is finally switching to a bullish scenario as we head into the coming season. We already know that we have a much smaller US crop than in recent years, the question is just how much smaller it will be?
West Texas seems to have lost quite a bit of potential, with acreage losses estimated at 0.5 to 0.8 mio acres. There has been some scattered rain over the last few days that brought some relief and more may be on the way tonight and tomorrow, but after that a high pressure ridge is supposed to bring above average temperatures.
If we calculate with a 14.0 mio bales crop for the US, which may be generous at this point, we will end up with total supply of 24.2 mio bales next season. Since export sales for the current marketing year have already reached 15.5 mio statistical bales, we will carry-in at least 1.6 mio bales in sales, plus there are 0.8 mio bales of new crop sales on the books.
This means that out of this 24.2 mio bales supply next season, 2.4 mio are already committed for export and 4.5 mio bales will be taken up by domestic mills. This leaves just 17.3 mio bales of US cotton for sale to overseas markets between now and the end of 2009.
The fact that we still have plenty of inventories to get mills comfortably into new crop may give buyers a false sense of security. Sure, right now there is no shortage of cotton and once new crop arrives, there will be enough for a while longer.
But once we get into the second and third quarter of 2009, the situation may not look so accommodative, especially if grain prices remain high and next year's cotton acreage shrinks further. The futures market is a discounting machine and it will not wait until the middle of next year to 'discount' a much more friendly market scenario.
One may argue that December has already discounted a higher price, because its current price of 80 cents is substantially higher than the cash market. It will therefore be interesting to see what gives, whether mills will have to pay up this summer or whether new crop futures will eventually trade down to the level of the cash market. Perhaps they will meet somewhere in the middle.
However, this is all based on a relatively benign market outlook, without any bullish surprises. If the Texas crop goes further downhill, it may very well be that the shorts see an urgency to cover their positions and this could trigger a rather explosive move higher.
The question in regards to cotton is whether the supply/demand situation is finally switching to a bullish scenario as we head into the coming season. We already know that we have a much smaller US crop than in recent years, the question is just how much smaller it will be?
West Texas seems to have lost quite a bit of potential, with acreage losses estimated at 0.5 to 0.8 mio acres. There has been some scattered rain over the last few days that brought some relief and more may be on the way tonight and tomorrow, but after that a high pressure ridge is supposed to bring above average temperatures.
If we calculate with a 14.0 mio bales crop for the US, which may be generous at this point, we will end up with total supply of 24.2 mio bales next season. Since export sales for the current marketing year have already reached 15.5 mio statistical bales, we will carry-in at least 1.6 mio bales in sales, plus there are 0.8 mio bales of new crop sales on the books.
This means that out of this 24.2 mio bales supply next season, 2.4 mio are already committed for export and 4.5 mio bales will be taken up by domestic mills. This leaves just 17.3 mio bales of US cotton for sale to overseas markets between now and the end of 2009.
The fact that we still have plenty of inventories to get mills comfortably into new crop may give buyers a false sense of security. Sure, right now there is no shortage of cotton and once new crop arrives, there will be enough for a while longer.
But once we get into the second and third quarter of 2009, the situation may not look so accommodative, especially if grain prices remain high and next year's cotton acreage shrinks further. The futures market is a discounting machine and it will not wait until the middle of next year to 'discount' a much more friendly market scenario.
One may argue that December has already discounted a higher price, because its current price of 80 cents is substantially higher than the cash market. It will therefore be interesting to see what gives, whether mills will have to pay up this summer or whether new crop futures will eventually trade down to the level of the cash market. Perhaps they will meet somewhere in the middle.
However, this is all based on a relatively benign market outlook, without any bullish surprises. If the Texas crop goes further downhill, it may very well be that the shorts see an urgency to cover their positions and this could trigger a rather explosive move higher.
Plexus Cotton Limited
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