NY futures come back with vengeance this week

12 Jun '10

6 min read

The USDA supply/demand report of this morning confirmed what we already knew, namely that the stocks-to-use ratio is extremely tight and that it may even get tighter in the coming season. US stocks are expected to be at 2.9 million bales at the end of July and are projected to drop to 2.8 million bales in 2010/11, while inventories outside the US are estimated to drop from 49.3 million bales this season to 46.8 million bales in the coming marketing year. Despite all the worries in the financial markets about a double-dip recession, the USDA predicts global mill use to increase to 119.5 million bales, up 0.4 million bales from last month. The foreign production gap, which amounted to a record 22.3 million bales this season, is foreseen at 18.6 million bales in 2010/11, which would be the second highest ever. Even though the US crop may to turn out quite a bit bigger than the current US estimate of 16.7 million bales, every bale will be needed in order to fill this foreign production gap.

So where do we go from here? With current crop basically sold out and certified stocks moving to China, July has become a very dangerous, volatile contract to trade and the sky is the limit. Tomorrow the Goldman Sachs roll enters its final day and after that liquidity will drop to a trickle, leaving shorts vulnerable to a squeeze. We therefore advise any remaining July shorts to get out of harms way and for mills to fix their remaining on-call positions without further delay. Although next year's global production is expected to be 11.4 million bales bigger, it is still going to fall 5.2 million bales short of consumption if we can believe the USDA forecast.

Even if production ends up being higher than current predictions and consumption disappoints, it will probably not be enough to reverse the tight ending stock situation we are in. Pipeline stocks are going to be depleted by the end of summer and it will take several months to replenish them. We therefore see no significant price pressure building until late in the year, if at all. However, the December contract should encounter a lot of producer selling near 80 cents, which should keep it in check for now. We therefore expect December to trade in a relatively narrow range of between 76 and 82 cents until we have a better idea about how the new crop balance sheet is shaping up.

Plexus Cotton Limited

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