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Cotton prices fall on news of better crop
Sep '08
Cotton prices collapsed this week under the weight of losses in other commodities. However, the bearish record US and world carryover levels should carry part of the blame. With prospects for the world crop size to increase, coupled with stagnant consumption around the globe, carryover levels became far to heavy for not only the market to hold the 67 cent level, but to fall through its 65 cent support and back to the year ago level just above 63 cents. Support at 63 cents, basis the New York December contract, should prove to be very significant.

As if the market knew a very bearish USDA world supply demand report was forthcoming, prices broke early in the week and fell to near 63 cents before finding support. Friday morning's USDA report then provided the news behind that very strong break in prices. Yet, the market rebounded on the USDA report, making a very strong statement that prices have actually bottomed, albeit some four cents below expectations.

USDA increased its estimate of the world crop to 112.17 million bales, up only marginally. However, 2008-09 usage was reduced some 840,000 bales, down to 123.70 million bales. Incorporating a slight increase in beginning stocks, USDA now estimates 2008-09 carryover will be 52.32 million bales, up 1.34 million bales from last month's estimate.

Chinese production was left unchanged at 35.5 million bales. However, consumption was lowered to 53 million bales, down 500,000 bales from the prior estimate. More importantly, China's absence from the world import market was noticed forcing USDA to lower its estimate of Chinese imports to 12.0 million bales, down 1.0 million from its August estimate.

Other notable changes included a decrease in the Pakistani crop, down 500,000 bales to 9.0 million. However, that was offset by an increase in the Indian crop, up 500,000 bales to 24.5 million. The U.S. crop was increased 80,000 bales, up to 13.85 million.

The one million bale reduction in Chinese imports led to a 500,000 bale reduction in U.S. exports, with that estimate now at 14.5 million bales for the 2008-09 marketing season. U.S. carryover is now estimated at 4.9 million bales, up 300,000 from USDA's August estimate.

Other potential near term bearish news lies in the weekly Cotton On-Call report and indicates the unfixed call purchases (futures needing to be sold) versus the unfixed call sales (futures needing to be bought) shows that December purchases out number sales. This has the tendency to be bearish. However, the report suggests that large quantities of call sales exist for the March, May and October 2009 period.

The weekly export sales report made it clear why USDA reduced its estimate of U.S. exports. Net export sales for the week ending 9-4-08 were 140,200 RB with Upland sales totaling 138,300 RB and Pima 1,900 RB. Primary destinations for Upland were Turkey, (34,400 RB); Mexico and Indonesia.

The primary destinations for Pima were Japan (900 RB) and Peru. Shipments were only 235,300 RB. Upland shipments were 233,700 RB and Pima shipments were 1,600 RB. Primary destinations for Upland included China, (81,900); Mexico and Turkey. Thailand (1,000 RB) and South Korea were the primary destinations for Pima.

If it seems anticlimactic to you, then know it is very anticlimactic to me. This week's 63 cent low should be the low for the year. However, if the world crop escalates any further, then the 60 cent mark could be tested. I do not believe it will, but … Nevertheless, the bullishness surrounding the crop to be planed tin 2009 still holds.

Bayer CropScience

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