NY futures closes once again mixed this week

27 May '11

5 min read

If the situation in West Texas doesn't change for the better over the next two or three weeks, US crop estimates will have to get scaled back significantly. The difference between rain and no rain could easily mean a swing of two million bales in the size of the US crop. If the US crop were to drop to let's say 16.0 or 16.5 million bales over the next few months, it would have a significant impact on the market. Since US export commitments for next season already amount to nearly 6 million bales of primarily high grade cotton and domestic mills also rely on around 3.8 million bales of mostly premium grades, shippers would probably be forced to stop selling additional high grades until the fate of the crop is known at harvest time. This in turn would shift demand to origins like India, West Africa or Central Asia and help to underpin their prices.

Outside markets were a positive influence on cotton this week, as managed money seemed to favor commodities again after the sell-off of a few weeks ago. The grain complex had a very strong showing due to planting delays in the US, with December corn closing within 5 cents of its 6.81 dollar/bushel contract high. Analysts fear that US corn acreage will fall around 2-3 million acres short of the latest USDA estimate, which if true should keep prices well supported throughout next season. Also, it was announced by the USDA that China bought 116'800 metric tons of corn from US shippers recently, a sign that China is ready to step in during sell-offs in order to bolster its inventory. Cotton traders should take note!

So where do we go from here? We are clearly in a weather market at the moment and the next move will depend on what happens in West Texas. Our guess is that West Texas will get some moisture over the weekend, but it may prove to be too little too late, as the forecast calls for a summerlike pattern to follow in its wake. Could this be the year in which West Texas won't be able to escape the drought?

While we have no firm opinion on July at this point, as we could easily see it move up or down 15 cents from here depending on what happens with the certified stock and outstanding mill fixations (still 2.0 million bales unfixed), we continue with the opinion that December represents decent value in the low 120's, even if the US crop were to improve.

Plexus Cotton Limited

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