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New cotton crop will bring relief in total supply

19 Jul '08
5 min read

This in turn supports the futures market now that it has lost most of its premium over the cash market. The further we move towards new crop, the more this US inventory will shrink. We estimate that between exports and domestic mill use around 1.5 mio bales will disappear every month, which between July 10 and October 30 would take care of roughly 7 mio bales.

New crop will bring relief in terms of total supply, but most of that new crop cotton will go straight into the government loan and wait for better prices with a lot of time on its hand. In other words, once this old crop inventory is gone, the bargain offers will likely be gone as well, because new crop is going to play hard to get. The same goes for India, which will not make the same mistake twice and oversell its crop again. This is likely to result in a firmer local basis throughout the coming season.

From a technical point of view, speculators may have remembered the old saying to 'never short a dull market' and it was certainly dull as we approached these recent lows. During the sell-off on Tuesday there were just 7'625 futures traded, which was the lowest turnover in almost a year.

The lack of downside momentum and the fact that open interest has hardly been rising during this move lower are warning signs to a technical trader that the trend may be reversing. It will take some time to repair the damage that was done on the chart, but the odds that a double bottom is forming are increasing. With a bit more time and consolidation we should eventually see some of the technical indicators point up again.

From a risk/reward point of view we certainly favor buying the market at current levels, although the bulls will probably need some patience before they see the next up move take hold.

Plexus Cotton Limited

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