Export sales remain fairly strong

30 Apr '10

6 min read

When we look at the latest US balance sheet, we had total supply of 18.5 million bales this season, from which 3.5 million are going to domestic mills and 11.3 million bales have so far been committed for export, leaving around 3.7 million for sale. However, we have to assume that at least 0.5 of the 0.75 million bales in export commitments for next season will come out of existing inventories and then there are probably another 0.5 million bales that domestic mills have booked for August/September delivery, which would bring the number of available bales down to just 2.7 million bales. Since the 1.0 million bales of certified stock form part of this number, there are really just about 1.7 million bales of 'free' bales floating around in the marketplace. And it's only April!

The certified stock has been at the center of much debate recently, as analysts are trying to gauge what kind of an impact this large inventory of over a million bales might have on the market. Cargill, who took control of the certified stock during the March delivery, has obviously not been able to do much with it and has decided to tender it back on the May contract, while two other merchants have stepped forward to assume ownership. Although the huge inversion between July and December may seem unsustainable, we need to look past this spread when making assumptions about the fate of the certified stock.

In this tight supply situation, where the certified stock currently amounts to over 30% of what remains unsold in the US, it is no longer just a superfluous chunk of cotton whose sole purpose it is to keep speculators in check. If US export sales were to continue at their recent pace, the certified stock would make up 50% of the unsold inventory a month from now and by the time July enters its delivery period it would basically represent all the cotton that's left for sale. We therefore need to look at the certified stock in terms of its cash market value rather than its spread to December. While NY futures at 86 cents are overvalued compared to currently available offers from the US, Africa or Brazil, it would be a different story if July were to drop to 78 or 80 cents, especially since many of these other origins won't have a lot left to offer in two months from now. If the certified stock were to find buyers (China?) for summer shipments, then its spread to December becomes irrelevant.

So where do we go from here? Based on the chart we may see some more downside in the near term, but unless there is a mass exodus of speculators we expect strong trade support to hold the market above 82 cents. In other words, as long as there is a large trade short to cover in July (unfixed on-call sales on July are still at 2.65 million bales), we don't expect the inversion to December to collapse in any meaningful way.

In the longer term much will depend on how new crop shapes up, but we may see a relatively firm market well into the fourth quarter. Only once the pipeline is well supplied with new crop cotton will there be a chance for prices to soften a bit, although we believe that the balance sheet will remain relatively tight throughout next season.

Plexus Cotton Limited

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