NY cotton futures drop

20 Feb '09

5 min read

Even though the latest USDA report was labeled as very bearish by the market, it is not so much the numbers as they present themselves at the moment but rather the trend they follow that is disconcerting. For example, we still have world consumption outstripping world production by 3.12 mio bales in the current report, which should be supportive.

World ending stocks of 61.7 mio bales are also not much different from the previous four seasons, when they were between 60.4 and 62.8 mio bales. However, the market is worried that the current consumption number may still be too high at 112.6 mio bales and in reality nobody knows where the real level of consumption is at the moment.

Most guesses are still somewhere around 105 - 108 mio bales, which would boost ending stocks to an uncomfortable level, especially when measured as a ratio to the much reduced consumption number. Another negative is the decline in border crossing trade, with world imports at just 29.3 mio bales, which is 8.7 mio bales less than last season and 15.2 mio bales less than 3 years ago.

While the US will only suffer a 2.1 mio bales reduction in its exports compared to last season and is well on its way to make or surpass the current USDA estimate of 11.5 mio bales, the rest of the world will have to fight over a much smaller pie between now and July 31.

So far government intervention has prevented a price war between foreign competitors, but some of these origins are starting to feel the pinch as they are approaching the planting season with vast inventories of unsold cotton. We therefore believe that it is just a matter of time until we see fierce competition between these origins at a time when demand is expected to remain tepid.

So where do we go from here? The market is due for a bounce, possibly in reaction to a decent export report or as relief of oversold technical conditions. However, we believe that any such bounce will be short-lived. In the near term we don't see any reason for prices to go much higher and believe that the path of least resistance is down, with a declining AWP leading the way to a retest of the lows near 40 cents.

In the longer term much will depend on whether consumption can hold it together and on how much cotton will get planted. It is simply too early to tell but at this point there is no indication that either will lead the market out of its current slump.

Plexus Cotton Limited

More Textiles News - United States Of America...