NY December futures slide by 227 points

02 Jul '10

5 min read

Despite the current weakness we believe that the bulls still have a valid case as we head into the coming season. Inventories will be nearly depleted by the time new crop arrives and that is nowhere more evident than in the US and China. After another excellent US export sales report of over 400'000 running bales, unsold current crop supplies must be down to just a few hundred thousand bales if our calculations are correct.

Total sales for the current season now amount to 13.7 million statistical bales, whereof 10.6 million have so far been exported. Commitments for the coming season currently stand at around 2.5 million statistical bales.

China, in a what looks to be a desperate attempt to curb runaway domestic prices, has agreed to release another 600'000 tons from its remaining Reserve, which is estimated at just 1.2 million tons.

This would bring the total amount of Reserve auctions this season to around 3.2 million tons. Since the Chinese government will not feel comfortable to see its Strategic Reserves reduced to less than a month of domestic mill use, it is all but a foregone conclusion that China is going to replenish these stocks the next chance it gets. In other words, we expect the Chinese government to potentially extract up to 2 million tons from the local and/or international market next season, which should provide strong support on any dips that might occur.

So where do we go from here? With the release of the USDA planted acreage number this week, the market has started to focus on the potential size of the US crop. We expect next week's USDA supply/demand report to show a crop of around 17.5 million bales, reflecting the bigger acreage and increased yield potential. Other crops around the globe should also show a slight net increase.

If correct, then the promise of bigger production and uncertainty regarding the economy should keep spec buying at bay for now, which means that it will be up to the trade to support the market.

However, since the trade is mainly buying on dips, we don't see where the momentum should be coming from to bid the market substantially higher at this juncture. As mentioned last week, the market sees plenty of supply in the fourth and first quarter and any potential shortage is not going to show up until the second and third quarter of 2011.

Although the market is a forward-looking mechanism, we doubt that it sees much more than six months ahead, with the exception of a few savvy traders perhaps. For this reason, we expect December to remain range-bound between 75 and 80 cents in the foreseeable future.

Plexus Cotton Limited

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