Export sales report once again disappoints market

24 Oct '09

5 min read

The fact that US cotton is not selling at the moment is not necessarily bearish, because mills are forced to turn to foreign growths and the more these competitors commit, the less likely it becomes for their prices to fall as we progress through the season. This in turn eliminates pressure on the A-index, which is supportive to US prices in the long run. This morning the daily AWP calculation crossed above the loan level for the first time this season, reading 52.38 cents, and we believe that it will be difficult to redeem US cotton for a lot less than the loan level over the coming months.

Remember, if the latest USDA statistics are more or less accurate, there will be a foreign production gap of over 18 million bales this season, which means that ultimately every last bale of US cotton will be needed to help fill this void. The US should therefore not worry that a difficult harvest and high prices are preventing it from concluding a lot of export business at the moment. In our opinion it will only be a matter of time before mills will chase after US supplies and it may actually prove to be an advantage to arrive late to the party this season.

So where do we go from here? The spec buying is for real and this may push prices to new highs over the next few sessions, especially if outside markets continue to act well and the US dollar remains weak. We are still allowing for the possibility of a pullback of 3-5 cents in case there is a pause in this seemingly relentless spec buying, but any such dip would probably be very well supported by pent up mill buying, the 5.4 million bales of unfixed on-call sales and traders who don't want to be short anymore.

Weather continues to be a factor and today the Delta received another 1.0 to 1.5 inches of rain, delaying harvest even further. The Southeast will probably get some additional moisture from this system as well, although it is generally in better shape than the Delta.

Whether the market can break out above the 70 cents level remains to be seen, but we would not bet against it, or if so only with the use of options. The upcoming notice period may prevent a further advance for now, but we don't see any reason why the market couldn't trade into the mid- to high-70's later this season.

Plexus Cotton

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