NY futures ended the week mixed, as May gave up 850 points to close at 200.32 cents, while December rallied 469 points to close at 132.50 cents.
While the May contract settled near the middle of a 7-week trading range, December was challenging its contract high of 135.76 cents. May seems to be in a topping process, reflecting what we have been seeing in the physical market recently, while
December has been getting plenty of support from bullish reports (planting intentions, export sales) as well as an announcement by the Chinese government that its Reserve would procure cotton at the equivalent of around 137 cents next season. As a result we have seen a narrowing of the steep inversion between current and new crop, from over 100 cents on March 7 to currently around 68 cents, and this trend is likely to continue.
US export sales report April 1, was a good example of the different dynamics that exist between current and new crop. While nearby commitments dropped by 38'800 running bales net (344'100 bales of new business was offset by cancellations of 382'900 bales), sales for next marketing year increased by 317'900 running bales.
For the current season total commitments now amount to around 15.9 million statistical bales, of which some 9.5 million bales have so far been exported. Total commitments for the 2011/12 marketing year are now just shy of 5.0 million statistical bales.
When we look at latest US supply/demand picture, we have total supply for this season at around 21.1 million bales (based on the final ginnings report which has the US crop at only 18.1 million bales). From this number we have to deduct export commitments of currently 15.9 million bales and domestic mill use of 3.6 million bales, which leaves us with a figure of around 1.6 million.
However, since export commitments for August onward shipment are already at 5.0 million bales and domestic mill use will likely amount to some 3.8 million bales next season, there is already a 'statistical deficit' of around 7.2 million bales and we are only at the end of March. This number is likely going to grow to well over 10 million bales by the time the coming crop gets harvested. In other words, the first ten million bales of new crop will likely have a home by the time they are ginned and it may therefore take quite a while until any crop pressure has a chance to develop.
Based on planting intentions report, which came in at a surprisingly low 12.6 million acres (12.3 million for Upland), the US crop may not grow big enough to create any price pressure at all. Based on the yields of the last two seasons and figuring abandonment of 8%, we may get a crop of somewhere between 18.7 and 19.8 million bales. Since we are still in a "La Nina" weather pattern and parts of Texas are experiencing a 44-year drought, it is probably prudent to work with a number at the lower end of this range until proven wrong.
So where do we go from here? We believe that the realignment process between current and new crop prices will continue. May and July futures may be able to hold their own due to the fact that there are still 4.75 million bales that need to get fixed by the middle of June. This relatively large amount of fixations still has the potential to spark some rallies in May and July, especially when liquidity dries up again after the Goldman Roll.
We still like December at its current level, because we feel that it will behave much more like a current crop than a new crop month. We would therefore not be surprised to see December trade up to the 145-150 cents area over the next few months. With the "China put" in place, we also believe that March, May and July 2012 have some upside potential, although not quite to the same extent as December.
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