In our opinion it would be a mistake to use the current number of 116.6 million bales as a benchmark from which to project future demand. The reason mill use is currently at "only" 116.6 million bales is not because demand is weaker than in 2006/07, but because there isn't more cotton available!
In other words, we believe that there is a lot of latent demand that would immediately surface if more supply were available. As we have previously stated, if global per capita demand for cotton was as high as US per capita demand, total global consumption would amount to roughly 470 million bales or about four times the current level. This illustrates the enormous growth potential on the demand side and traders need to get away from their 'years of plenty' mindset, which ceased to exist once the other half of the world's consumers, led by China and India, started to come into the picture several years ago.
We believe that we are now in a perpetual state of resource scarcity, in which the world is struggling to meet increased demand for food, energy, clothing and just about any other wants and needs this growing army of consumers may have. Demand will have to be throttled down, but that can only happen via higher prices.
Another reason to be optimistic about the "nominal" price of cotton is that its denominator, the US dollar, is likely to weaken further over the coming years. The US is currently running a budget deficit of around 1'700 billion dollars a year and a current account deficit of nearly 500 billion dollars annually, which have become impossible to finance without the Fed monetizing a huge part of this new debt by printing money out of thin air. Since the Euro and Yen are facing similar problems, the debasement of the US dollar may not be felt as much in the cross rates with other major currencies, but will instead manifest itself in higher gold, crude oil and commodity prices.
So where do we go from here? Mills have once again missed an excellent opportunity to reduce their on-call exposure during last week's price break. With US export sales still running strong and de-certifications starting to show up, the May and July contracts have maintained their explosive upside potential and new highs are therefore not out of the question yet.
For reasons mentioned above we do like December at its current level, because we feel that it will act more like a current crop month with supply issues rather than a new crop month with plenty of availability. Although a record crop may be on its way, there will be so much pent-up demand from mills trying to stretch their requirements into new crop that it will be logistically impossible to oblige everyone in a timely manner before early 2012. Once mills realize this predicament, they will likely scramble for coverage similar to what we have seen this season, which could bid up the December contract quite substantially.
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.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "UBM China (Shanghai)")
-Ltd..jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "Thermore (Far East) Ltd.")
