NY market continues to go down

13 May '11

6 min read

Global trade is expected to increase from 37.0 to 39.9 million bales, as many importers are trying to bolster their inventories, led by the Chinese Reserve who will want to refill its strategic stock. What caught our eye is that China is expected to import 16.0 million bales (2.5 million bales more than this season), while the US may export just 13.5 million bales (2 million less). The US has already sold 5.8 million bales for next marketing year, of which China has booked just 1.9 million bales.

In other words, unless China becomes a lot more aggressive, it is on track to import only about 4.5 million bales from the US. China would then have to import the remaining 11.5 million bales from origins like India, Central Asia, Brazil and Africa, and thereby take up a large chunk of their exportable surplus, which in turn should keep prices fairly well supported.

Ending stocks are expected to grow by about 5.4 million bales to 47.9 million bales next season. The increase is nicely spread among various origins, with India stocking up 1.2 million bales, China 0.95 million, the US 0.75 million, Pakistan 0.53 million, while all the others add about 2.0 million bales combined.

The market seems to rate the USDA report as bearish, mainly because ending stocks are expected to climb by 13%. However, as explained above, an increase in ending stocks does not necessarily have to depress prices. The fact that imports are projected at nearly 40 million bales due to restocking should help to counterweigh bearish forces. Also, it won't be an easy task to produce a record crop given the weather pattern we have seen so far this spring, while demand may prove to be understated.

So where do we go from here? Two months ago mills were still chasing after a limited amount of offers, but now the tables are turned, as merchants are trying to find mills to sell their remaining inventory to. With current crop prices in decline, mills are only buying what is absolutely necessary right now, which has created an overhang of offers that is keeping the market under pressure.

There will be a point at which mills will have to re-enter the market in greater numbers, be it to fix the remaining 2.25 million bales of on-call sales in July or to cover future needs. However, with July still trading at 25 cents above December, mills may choose to remain in hiding for now. While July may have to trade even lower in order to attract business, we feel that December has been punished enough and represents a decent value at current levels.

Plexus Cotton Limited

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