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New York cotton future under pressure

17 Mar '12
5 min read

We therefore don't expect to see much price pressure from the two largest exporters, the US and India, for the remainder of the season. Once all the cheap cotton has been bought up, mills will have to deal with higher priced origins like Australia and Central Asia (Uzbekistan and Turkmenistan). Although it is likely that these more expensive growths will eventually have to be discounted as well in order to book sales, this will probably occur via a weaker basis.

New crop shapes up to be an entirely different story! Not only are we looking at yet another seasonal surplus of perhaps 5 or 6 million bales, but China will probably not be there as a buyer of last resort, at least not to the same extent as this year. We may therefore see a lot more pressure on prices from origins all around the globe in the coming season.

Take the US for example, which is looking at a potential crop of 17.5 - 18.0 million bales, but has only sold about 0.7 million bales at this point. Therefore, if another large world crop were to materialize and demand doesn't recover beyond current expectations, we could see December futures trade down to 75-80 cents by harvest.

There are several reasons why the market is not quite ready to discount such a dismal scenario:
1) The crop is not yet planted and intentions could still change, especially since soybeans and corn have been rallying lately.
2) Even if the crop were to get planted as intended, there is a lot of weather to negotiate and patterns have been rather erratic lately.
3) The continuous money printing by central banks is creating a tide that will eventually lift all the boats, be it the stock market, real estate or commodities. It is therefore dangerous to get too bearish on anything that has a dollar sign in front of it.

So where do we go from here? There is no doubt that the path of least resistance is currently down. However, since US current crop is well committed, we are hesitant to short May and July and prefer to do short hedges in the December contract instead. If the market doesn't build carry between July and December, we would expect any remaining old crop stocks to be aggressively offered, as no one wants to hold on to cotton going into a bearish new crop situation. This in turn should put pressure on the basis of these various origins over the coming months.

Plexus Cotton Limited

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