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Market for cotton exports continues to disappoint
Sep '08
Coupled with declining consumption and a record level of carryover stocks as well as certificated stocks of 1.4 million bales, it is easily clear that the New York cotton contract is trading its current supply and demand fundamentals. Then add the current financial/debt crisis and one must wonder how cotton can hold 55 cents, much less the 61-62 cent bottom it appears to be holding.

The demand side of the market is unable to generate any good news. However, the supply side offers tid-bits of information that suggest various regions of the world are facing weather related anomalies. Volatility will remain a market buzz word well into 2009 if not longer.

Yet, for now the 61 cents does appear cheap and will likely continue to support the market. Nevertheless, a move above 68 cents will be all but impossible in the absence of severe harvesting difficulties. In the near term I would bet more on falling below 61 cents than ever seeing December back above 68 cents.

The market for U.S. cotton exports continues to disappoint. While last week's report was very positive, export sales for the week ending 9-18-08 were most disappointing given that the market was generally 500 points lower than the prior week when sales were so good.

Net sales were 241,900 RB. Upland sales accounted for 251,100 RB with China (62,000 RB); Turkey and Thailand being the primary buyers. Only 800 RB of Pima were sold with China being the major buyer. Export shipments were only 222,500 RB of which 221,300 RB were Upland and 1,200 RB were Pima. Primary destinations for Upland cotton were China (104,300); Mexico and Thailand. The primary destinations for Pima were Indonesia and Thailand.

Also disappointing, but somewhat expected was the domestic consumption for August. The U.S. Department of Commerce reported that U.S. textile mills used cotton during the month of August at the annualized rate of 4.6 million bales. The consumption rate for July was revised slightly lower, also down to 4.6 million bales. Consumption for August 2007 was 200,000 bales higher, at 4.8 million. We should expect to see U.S. mill consumption move lower; likely falling to near 4.0 million bales by 2011.

The weekly Cotton on Call Position Report continues to suggest much more selling pressure than support from buying. December call purchases outnumber same month call sales by some 3,000. Yet, call sales for the combined March, May and July 2009 contracts months out number call purchases by almost by 26,000, a staggering difference. Call sales for those three contract months are 28,000 while call purchase are 2,000.

As suggested last week, that difference, coupled with the bullish consensus numbers, suggests a rally in cotton by late winter or early spring. Too, by late winter the market will likely focus on the expectation that U.S. planted acreage will be down for the third consecutive year. Of equal importance, supply demand balance sheets will begin to reflect world stocks to use ratios in the upper thirty percentile, paving the way for a more bullish attitude.

It is not so much that the cotton market is marching in place waiting for news of the massive subsidies for Wall Street, but rather the end of the dog days of summer and a better definition of the size of the Northern Hemisphere crop. The market will remain volatile, disappointing and generally trade back and forth until the new year.

Bayer CropScience

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