Mixed reaction in NY cotton futures

15 May '09

5 min read

Not only are ending stocks in China, India and Central Asia expected to rise by a combined 4.9 million bales at the end of this season, from 29.8 to 34.7 million bales, but the respective governments control a much higher share of these inventories than last year. Therefore a lot will depend on how governments in China, India and Central Asia decide to manage their stocks. It is likely that they will not be released in any volume unless a certain price target is met, which should support world prices.

When we look outside these origins we are seeing a tightening trend. Inventories elsewhere are down from 32.2 million bales last season to just 27.6 million bales at the end of the current marketing year and they are expected to fall by another 2.0 million bales to around 25.6 million bales the end of the 2009/10 marketing year. This would be quite a significant drop in such non-government controlled stocks at a time when border crossing trade is expected to increase again. The USDA predicts world exports to rise by 4.4 million bales next season, from 28.4 to 32.8 million bales.

The US should continue to do well under these circumstances. Not only does it have the smallest supply in 11 years at just 20.1 million bales, but it will only have to compete for 33.5% of the world's exports next season, down from 44% in the current marketing year, yet it will still see its ending stocks decline by 1.2 million bales. In other words, the US should feel less pressure to perform next season, which will allow it to be pickier in regards to the business it chooses.

So where do we go from here? The market's ascent was too fast and furious and it needed a break. Looking at the chart it may pull back a bit further and possibly revisit the old uptrend channel that was in force between early March and late April, which would put July in a 54.50 to 57.50 cents range in the near term.

However, the longs seem to have staying power and we want to reiterate that this drop was not the result of any long liquidation but rather some new spec shorts that came in. The longer term technical and fundamental picture still looks constructive to us and we believe that the market will be well supported on any dips into the mid to low 50s.

Plexus Cotton Limited

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