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Market continues to bounce back this week
29 Aug '08
5 min read
US export sales of 269'100 running bales for the week ending August 21st were fairly decent, although shipments of just 271'700 bales remain disappointing. The fact that the US is not able to export its 3.9 mio bales of outstanding sales at a faster pace combined with the still large amount of unsold inventory makes it difficult for prices to rally at the moment.
So where do we go from here? Even though there are some supporting factors on the horizon as explained above, these plentiful US supplies should keep the upside contained in the near term. In the longer term the statistics hold a lot of promise, but the market is becoming very skeptical of these bullish August projections because they sound like a broken record.
Two years ago, the USDA August report predicted ending stocks to fall from 52.49 mio bales to 48.29 mio bales, but we ended up with 57.86 mio bales. The same scenario repeated itself last season, when the USDA saw a decline from 57.86 mio bales to 51.52 mio bales, only to see ending stocks rise to 60.36 mio bales at the end of last month. Now the USDA predicts an even steeper drop in the current season, from 60.36 mio bales to 50.98 mio bales.
Are we likely to get disappointed again? We believe that there are several factors that support a significant drop in world ending stocks. For one, expectations are not as high as they were for the last two seasons. In 2006/07 China was expected to import 20 mio bales, but ended up taking just 10.59 mio bales. Last year China was supposed to import 16 mio bales, but again the real number was quite below expectations at just 11.50 mio bales.
For the current season the USDA sees only 13 mio bales of Chinese imports, which doesn't seem to be too far off the mark. With world production definitely dropping due to lower planted acreage, we may finally see a tightening of the world balance sheet, although it will probably take a while for this tightness to be felt in the marketplace.
While we see no reason for the market to break out of its sideways pattern anytime soon, we also believe that the longer we stay at these depressed prices, the steeper the ascent will be once we reach the inflection point of tighter stocks.
So where do we go from here? Even though there are some supporting factors on the horizon as explained above, these plentiful US supplies should keep the upside contained in the near term. In the longer term the statistics hold a lot of promise, but the market is becoming very skeptical of these bullish August projections because they sound like a broken record.
Two years ago, the USDA August report predicted ending stocks to fall from 52.49 mio bales to 48.29 mio bales, but we ended up with 57.86 mio bales. The same scenario repeated itself last season, when the USDA saw a decline from 57.86 mio bales to 51.52 mio bales, only to see ending stocks rise to 60.36 mio bales at the end of last month. Now the USDA predicts an even steeper drop in the current season, from 60.36 mio bales to 50.98 mio bales.
Are we likely to get disappointed again? We believe that there are several factors that support a significant drop in world ending stocks. For one, expectations are not as high as they were for the last two seasons. In 2006/07 China was expected to import 20 mio bales, but ended up taking just 10.59 mio bales. Last year China was supposed to import 16 mio bales, but again the real number was quite below expectations at just 11.50 mio bales.
For the current season the USDA sees only 13 mio bales of Chinese imports, which doesn't seem to be too far off the mark. With world production definitely dropping due to lower planted acreage, we may finally see a tightening of the world balance sheet, although it will probably take a while for this tightness to be felt in the marketplace.
While we see no reason for the market to break out of its sideways pattern anytime soon, we also believe that the longer we stay at these depressed prices, the steeper the ascent will be once we reach the inflection point of tighter stocks.
Plexus Cotton Limited
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