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NY market continues to go down
May '11
NY futures continued to slide, with July dropping 256 points to close at 144.30 cents, while December gave up 289 points to close at 119.19 cents.

The return of some mill buying for nearby shipment allowed the market to catch its breath for a few days, with July trading as high as 155.12 cents on Wednesday. But the recovery proved to be nothing more than a "dead cat bounce", as mills have since returned to the sidelines and the market has resumed its downtrend.

The US export sales report of this morning displayed a familiar picture, as for every current crop bale that was able to find a home there was another one that got cancelled. Last week 59'500 running bales were sold for the current marketing year, while 61'300 running bales got cancelled, resulting in yet another net reduction of 1'800 running bales. On the other hand commitments for the 2011/12 marketing year continued to grow by 76'000 running bales and now amount to nearly 5.8 million statistical bales.

On Wednesday the USDA provided us with their first detailed estimate for the 2011/12 season. For the first time in six years, the world is expected to produce more than it consumes, thereby reversing a trend of sharply declining stocks.

Since the 2006/07 season global stocks have been reduced by nearly 20 million bales to just 42.5 million bales, which equal a little more than 4 months of global mills use. However, since the statistical snapshot is taken on July 31, most inventories will be nearly depleted by the time new crop comes off the field this fall.

The USDA forecasts world production at an all-time high of 124.7 million bales, which would surpass the record from 2006/07 by around 2.9 million bales. Since the US crop is expected to be more or less unchanged at 18.0 million bales, the rest of the world will have to produce a crop that is 10.2 million bales bigger than in the current season. The USDA believes that China will get to 33 million bales (7.185 million tons), while India will grow a record 27 million bales (34.6 million Indian bales). While this is certainly possible, a lot needs to go right in order to get there.

While production is expected to soar, the USDA counts on continued demand destruction to keep global mill use subdued at just 119.5 million bales. Although that amounts to 3 million bales more than in the current season, it is still 4.3 million shy of the record 123.8 million bales that were consumed during the 2006/07-season.

You may recall that in its December 2007 report the USDA projected global mill use to reach as much as 128.27 million bales in the 2007/08 season. Then the financial crisis happened! But has demand really suffered such a blow that it is nearly 9 million bales below the potential of four seasons ago? We seriously doubt it!

Although retail demand has remained stagnant in the US and Europe in recent years, it has been growing by leaps and bounds elsewhere around the globe, especially in China and India. World population alone has grown by 300 million people over the last four years and is expected to cross the 7 billion people mark by the end of this year. We therefore believe that the consumption number may harbor a positive surprise as we head into the coming season.

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