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Cotton prices destined to move higher by Q2 or Q3
16
Jan '10
NY futures closed basically unchanged this week, with March inching up just 2 points to close at 72.91 cents.

The market made a valid attempt to generate new upside momentum on Monday by rallying all the way up to 74.49 cents, but there was simply no follow-through buying and values quickly retreated to their recent lows. To make matters worse for the bulls, today's close was slightly below the uptrend line dating back to August 27 on the daily chart, which may invite additional spec selling in the sessions ahead.

The latest USDA supply/demand report and today's export sales report were reminders that perception is often more powerful than reality. In both cases the expectations for more bullish numbers were not met and the market ended the respective sessions with sharp losses. However, in our opinion both of these reports were anything but bearish and should instead be seen as building blocks for a strong bullish case going forward.

The USDA report showed only minor changes overall, with world production basically being left unchanged at 102.71 million bales and world use down a minor 150'000 bales at 114.36 million. Of course the devil lies in the details and there was a 500'000 bales increase in the Chinese crop to 32.0 million bales that caught some traders by surprise.

However, while China, who is the world's largest importer, saw its crop estimate raised, the US and India, who are the world's two leading exporters, had their production numbers reduced by 200'000 and 300'000 bales, respectively. Since China seems to have no intention to slow its imports, the fact that the US and India have less to offer to the world should in our opinion be seen as bullish, not bearish.

Today's US export sales number also failed to live up to expectations after the 'whisper number' had sales at 500'000 bales or more. However, a marketing-year high of 440'700 running bales of Upland and Pima is certainly nothing to sneeze at. For the current season total commitments have now reached just under 7.0 million statistical bales, with almost 30 more weeks to go until the end of July.

After adjusting for the lower US crop estimate and taking last week's export sales into account, the US had only about 8.35 million bales left for sale as of January 7th. We can't stress enough how little cotton that is given that mills have hardly any forward coverage and with China having a voracious appetite for imports. It is still a very long 9 or 10 months until new crop will bring relief.

The latest on-call report shows that mills took advantage of last week's dip to fix a substantial amount of cotton. As of January 8, unfixed on-call sales dropped to 4.95 million bales after a net reduction of 332'400 bales during the week. Unfixed on-call sales in current crop March, May and July still amount to 3.54 million bales, which will provide decent support as this amount needs to be fixed within the next five months.

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