Mills will stick on their selective hand-to-mouth buying strategy

08 Aug '09

5 min read

The bottom line is that it will be difficult to generate big price moves in a market with a balanced supply/demand scenario. Prior to the big up and down spikes of 2008, which were caused by a speculative bubble and its subsequent implosion, you may remember that the market traded the previous three years in a rather narrow, boring price range of around 42 to 60 cents, with the bulk of the action occurring in a 48-56 cents band.

Not surprisingly, supply and demand in those years was very balanced. In 2005/06, we had a production surplus of 0.26 million bales, in 2006/07 there was a production deficit of 1.05 million bales and in 2007/08 there was another shortfall of 1.76 million bales. The 2008/09 season, which just ended, supposedly saw a production deficit of 3.4 million bales, but there will be several revisions before this number is written in stone.

So where do we go from here? Unless we see some big changes in the supply and demand numbers down the road, we feel that the market will likely get trapped into a trading range from which it will difficult to escape. Due to the weaker dollar we will probably see a higher range than we did between 2005 and 2007, but not by a whole lot. The 60 cents level makes sense to us at the moment, since it allows both mills and producers to survive, although growers need good yields for this to be true. Speculators still play an important role in this game, but they don't hold the same power as they did a year ago when open interest was over 300'000 contracts. Our best guess is that the market will establish itself in a range between 55 and 65 cents in the foreseeable future.

Plexus Cotton Limited

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