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Jump in on-call sales may make hope for cotton market
21 Aug '10
5 min read
Even though the unusually tight stock situation coupled with the expectation of another output gap this season are painting a bullish picture going forward, we need to be mindful of factors that could potentially derail the bullish case. The most likely such event would be an unexpected drop in consumption, brought about by a deepening recession in the US and Europe.
The news in the US has not been encouraging lately, with the housing market softening again and jobs showing no signs of recovering. To make matters worse for many cash-strapped US consumers, there are substantial tax increases looming in 2011, which will hit all levels of income.
Most people don't seem to be aware yet of how steep these tax hikes are going to be, but we believe that they will take a significant bite out of consumers' discretionary spending next year. Since European consumers are forced to some belt tightening as well because of austerity measures, we might see a rather nasty drop in sales and hence GDP in 2011. Whether Asia will once again be there to offset weakness in the West remains to be seen.
So where do we go from here? As long as the Northern Hemisphere crops are still out in the field we don't expect to see any major pressure on the market whatsoever. The existing pipeline shortage, continued mill buying and the huge amount of unfixed on-call sales are providing plenty of support. The question is whether the market will remain in a trading range near current levels or whether we could see a move towards 90 cents and beyond.
If the weather cooperates the market is likely to remain range-bound, but another setback in one of the major crops would probably lead to short covering and send values higher. In that regard we are a bit worried about the current sea surface temperature anomaly that exists between the Pacific (much colder than normal) and the Atlantic (much warmer than normal), which has the potential to wreak havoc with the weather as we head into the harvest period.
Once the crops are in we need to take a fresh look at supply and demand, but in all likelihood we should see prices well sustained near current levels throughout the season.
The news in the US has not been encouraging lately, with the housing market softening again and jobs showing no signs of recovering. To make matters worse for many cash-strapped US consumers, there are substantial tax increases looming in 2011, which will hit all levels of income.
Most people don't seem to be aware yet of how steep these tax hikes are going to be, but we believe that they will take a significant bite out of consumers' discretionary spending next year. Since European consumers are forced to some belt tightening as well because of austerity measures, we might see a rather nasty drop in sales and hence GDP in 2011. Whether Asia will once again be there to offset weakness in the West remains to be seen.
So where do we go from here? As long as the Northern Hemisphere crops are still out in the field we don't expect to see any major pressure on the market whatsoever. The existing pipeline shortage, continued mill buying and the huge amount of unfixed on-call sales are providing plenty of support. The question is whether the market will remain in a trading range near current levels or whether we could see a move towards 90 cents and beyond.
If the weather cooperates the market is likely to remain range-bound, but another setback in one of the major crops would probably lead to short covering and send values higher. In that regard we are a bit worried about the current sea surface temperature anomaly that exists between the Pacific (much colder than normal) and the Atlantic (much warmer than normal), which has the potential to wreak havoc with the weather as we head into the harvest period.
Once the crops are in we need to take a fresh look at supply and demand, but in all likelihood we should see prices well sustained near current levels throughout the season.
Plexus Cotton Limited
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