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Cotton trade now operates under much tighter credit
Mar '09
NY futures continued to lose ground this week, with May dropping another 286 points to close at 41.38 cents, while December fell 289 points to close at 46.88 cents.

Despite another encouraging US export sales report this morning the market continued on its downward path to retest the May contract low of 40.25 cents. Last week the US sold another 241'700 running bales, which brings the 3-week total to 1.27 mio running bales.

For the marketing year, total commitments have now reached 10.6 mio statistical bales, whereof 6.7 mio bales have so far been shipped. The pace of shipments showed an accelerating trend last week, as 253'300 running bales crossed the border, which was the highest number since the end of November.

However, as we have pointed out before, the fact that the US is selling its cotton at such a fast pace at the moment is a 'Catch-22' in regards to prices. Typically one would expect values to go up if demand is strong, but that is not necessarily how things work under the US marketing program.

The more the US sells, the less the rest of the world is able to fill its order books. And if the rest of the world is not able to get rid of its still very large stockpiles, there will sooner or later be panicky sellers who slash their prices in order to dispose of inventory. This in turn lowers the A-index/AWP, which leads to lower US cash prices and causes the futures market to trend lower as well.

For the coming week, the AWP will be set at 32.79 cents, or 161 points lower than this week. When we look at the current composition of the A-index, which was at 50.90 cents this morning, we have the two US quotes leading the way, with MOT at 49.00 and Memphis/Eastern at 50.75 cents. The next three spots are taken by West African growths at 51.50 cents each. The origins with the largest inventory for sale, India and Uzbekistan, follow at a more distant 52.25 and 55.75 cents, respectively.

Assuming that the spot futures month is still confined to a band of about 8 - 12 cents above the AWP, it puts the range for May currently at around 40 to 44 cents, considering that the daily AWP rate is about 32.00 cents today. For the futures market to break below the 40 cents level, we probably need to see the AWP drop another 200 to 250 points.

Although this may eventually happen, it could take some time, as most origins are reluctant to drop prices any further at the moment. Last week the CCI in India sold about 2.0 mio bales (of 375 lbs) to its domestic market at only slightly discounted prices, thereby alleviating some of the selling pressure.

The recent drop in prices was probably due to a lack of buying rather than aggressive selling by any particular group. Volume has been anaemic since the March roll and open interest has barely changed over the last couple of weeks. Both the ICE and CFTC spec/hedge reports show only minor shifts in the positions of the various market participants, with the dominant feature still being new short positions by speculators replacing those that the trade covers. The latest CFTC report showed that large and small specs increased their net short by 5'976 contracts, while the trade reduced its net short by 5'583 contracts.

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