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New cotton crop will bring relief in total supply
Jul '08
NY futures traded sideways this week, with December dropping 47 points to close at 73.11 cents, while March slipped 41 points to close at 78.53 cents.

After the severe beating the market took over the last couple of weeks, there was a sigh of relief among bulls that the market managed to hold its recent lows. Cotton was actually displaying some relative strength, as it bucked the negative trend that prevailed in the commodity complex this week, which saw the CRB lose 5 percent.

Cotton seems to have some solid fundamental and technical support around 70 cents. Cash prices have never really participated in the extreme swings that we saw in the futures market in recent months. When cotton futures briefly traded over a dollar, the physical market remained for the most part unimpressed and prices moved only a few cents higher, and now that futures have crashed cash prices are acting as a stabilizing force on the futures market, since they refuse to go down by much.

When we look at the availability of cotton around the globe at the moment, we find that most of the available inventory is concentrated here in the US. Taking into account the 9.4 mio bales of beginning stocks and a crop of 19.2 mio bales, the US started this season with 28.6 mio bales of supply. Of that, 12.6 mio statistical bales have so far been shipped overseas (as of July 10) and about 4.4 mio bales have to date been used up by domestic mills.

This leaves currently around 11.6 mio statistical bales that are still physically located in the US (committed or not), of which almost half is in the government loan. The other half is being carried outside the loan by growers, coops and merchants. We know that about 1.8 mio statistical bales are in the certificated stock and there is always a certain amount in transit. However, no matter how we try to slice it, there is plenty of US cotton in the marketing channels at the moment and this seems to prevent cash prices from gaining much traction.

Outside the US the situation is quite different. India has overcommitted its crop and will enter the coming season with virtually no stocks at all, while most of the other origins are also well sold. However, mills seem confident that this still relatively large US inventory will ensure that there is no shortage of cotton until the various Northern Hemisphere crops arrive in a few months from now.

Therefore, the statistical tightness that the USDA numbers suggest will probably not be felt until well into the 2008/09 marketing year and most mills are not willing to look that far into the future at the moment due to the uncertain outlook on the economy.

Nevertheless, while mills may refuse to pay the higher prices that the futures market is demanding on forward shipments, they will take advantage of any dips that allow them to buy high grades somewhere in the mid- to high-70's, landed Far East. The fact that global availability is relatively limited combined with the short coverage of mills should ensure that there is decent support in the cash market from here on down.

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