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Chinese importers likely to become more aggressive after holidays
24 Dec '09
5 min read
As we ring out 2009, it merits taking a look at what has happened this year and what we may expect in 2010. We began this year with the spot month at 49.02 cents and after dropping back to 40.01 cents by early March, a new bull market was born that has so far lasted nearly ten months and 34 cents. From a historical perspective the air is definitely getting thinner at these levels. Looking at a ten-year monthly chart we notice that there were just three occasions during which the market closed higher at month end than where we are trading today. The first two were during the bull market of 2003 (76.73 in October and 75.07 in December) and the third one was in early 2008 (79.66 in February). As you can see we are now within striking distance of these values, which tells us that we need to get more cautious in regards to bullish expectations.
Adjusted for the US dollar there is still room to the upside, because in 2003 the Dollar Index was about 20% higher than today, which would put the comparative value for cotton near 90 cents. On the other hand yields have improved over the last six years in many parts of the world, which makes prices near 80 cents quite attractive to growers. We believe that if prices hold at current levels, acreage will increase considerably next year. However, before getting too bearish on forward prices, we need to realize that global production needs to increase by 12 million bales just to catch up to where consumption is today. In other words, the first 11-12% of a potential increase in production will not add to stocks next season. Only if world production were to grow beyond that could we potentially see a negative impact on prices, but there is still a long way to go before we cross that road.
In the meantime mills have to deal with a very tight supply situation in the second and third quarter of 2010 and we therefore believe that this bull market has not reached its zenith yet. Also, while the bull markets of 2003 and 2008 did not produce a monthly close above 80 cents, both had some short-lived spikes that took prices to 85 cents and 109 cents, respectively, and there is nothing to suggest that the current Bull Run couldn't culminate in a firework like that!
Adjusted for the US dollar there is still room to the upside, because in 2003 the Dollar Index was about 20% higher than today, which would put the comparative value for cotton near 90 cents. On the other hand yields have improved over the last six years in many parts of the world, which makes prices near 80 cents quite attractive to growers. We believe that if prices hold at current levels, acreage will increase considerably next year. However, before getting too bearish on forward prices, we need to realize that global production needs to increase by 12 million bales just to catch up to where consumption is today. In other words, the first 11-12% of a potential increase in production will not add to stocks next season. Only if world production were to grow beyond that could we potentially see a negative impact on prices, but there is still a long way to go before we cross that road.
In the meantime mills have to deal with a very tight supply situation in the second and third quarter of 2010 and we therefore believe that this bull market has not reached its zenith yet. Also, while the bull markets of 2003 and 2008 did not produce a monthly close above 80 cents, both had some short-lived spikes that took prices to 85 cents and 109 cents, respectively, and there is nothing to suggest that the current Bull Run couldn't culminate in a firework like that!
Plexus Cotton Limited
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