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NY cotton futures gain marginally last week

21
Apr '12
Plexus Cotton Limited reported that NY futures ended the week unchanged to slightly higher, as July gained 92 points to close at 90.72 cents, while December was up just 1 point to close at 88.31 cents.

The rapid decline in May open interest has removed the fuel for a potential short-squeeze and as a result the market was unable to sustain any upward momentum this week. As of this morning there were just some 7'000 contracts open in May, which means that the upcoming notice period will probably turn into a non-event.

The focus has now shifted to July, the new spot contract, which has inherited a big chunk of May's open interest.

There are currently 102'712 contracts open in July, with most of the long side belonging to index funds, while the shorts are mainly owned by the trade and to a lesser degree by speculators. Since we have a disproportionately high number of shorts (10.2 million bales) compared to the amount of cotton that remains uncommitted in the US (around 2.0 million), there is still the potential for some short-covering rallies along the way.

However, since US export sales have shifted into reverse for the last three weeks and the outlook for new crop is not bullish at the moment, the shorts don't seem to be too worried and are adopting a wait-and-see attitude.

US export sales for the week ending April 12 were once again negative with net reductions of 3'900 running bales. On the positive side there were still 17 countries buying a total of 74'100 running bales, which shows that US cotton remains an attractive alternative in many markets, but cancellations of 78'000 bales pushed the overall number into the minus column for a third consecutive week. For the season total commitments remain at around 11.8 million statistical bales, whereof 7.7 million have so far been exported. Additionally there are still 1.2 million statistical bales in 'optional origin sales', of which 94% are to China.

The recent string of export sales cancellations, most of which involved China, is somewhat disconcerting when we consider that half of all remaining commitments are owed to China. Of the 3.82 million running bales that are still unshipped, 1.96 million bales are for China, followed by Turkey (0.32 million bales), Mexico (0.31 million), Thailand (0.22 million) and Bangladesh (0.19 million). These five markets account for nearly 80 percent of all outstanding commitments.

China clearly holds the key in regards to the market's next move! Will China take all of the 2 million bales of US cotton that it is still to receive this marketing year or will there be further cancellations? How about the 1.1 million bales in optional origin sales to China? What will happen to the estimated 2.5 – 3.0 million bales in consignments that are already located in Chinese ports? Are there enough import quotas left to clear all the above volume or will China suddenly shut its door? It would seem that existing quotas are about to run out, but since China's government is still sitting on its huge reserves, it may allow more of the cheaper foreign cotton to come in via supplemental quotas.


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