NY cotton futures under new pressure this week

05 May '12

6 min read

Plexus Cotton Limited reported that New York (NY) futures came under renewed pressure this week, as July dropped 290 points to close at 89.21 cents, while December lost 255 points to close at 86.52 cents.

NY futures sold off earlier this week after India announced that it would lift its export ban, which has been in force since the beginning of March. Although India's latest edict has apparently no quantitative limitations, there is still considerable doubt as to how many bales the government will ultimately allow to be shipped, especially when considering that the latest estimate by the CAB has ending stocks at just 2.5 million local bales.

Domestic prices in India actually rose after the announcement, but the drop in NY futures was probably the result of longs exiting positions, since a potential short squeeze in the July contract is now less likely due to the promise of additional supplies in the system.

While India may bring more cotton to the world market, China seems to be ready to receive it. It is strongly rumoured that a fresh 1 million mt “general” quota has just been issued of which at least half a million is now being distributed to mills.

At this juncture, it does not seem to be tied to buying of Reserve stocks as had been rumoured, but no official announcement has yet been published. If it proves to be true, it will still remain unclear how much of this quota will be used to clear existing consignments lying in China, existing commitments yet to be shipped and how much will actually be used for new business.

The latest US export sales report showed no evidence of additional buying by China just yet. For the week ending on April 26, net sales for the current marketing year were down by 14'200 running bales, while commitments for next season rose by 79'200 running bales.

Cancellations by China as well as eight other markets totaling 95'200 running bales raised renewed questions as to how many of the 3.5 million bales in unshipped commitments should be considered as dubious. Counteracting these fears were strong shipments of 336'400 running bales to no less than 25 different markets, which is a clear sign that mills around the globe still want and need US cotton.

Notwithstanding the unpredictable actions by China and India, which cause some erratic moves in the market, it doesn't change the fact that there is currently too much cotton in the world, after we have witnessed one the most dramatic statistical swings over the last two years that has taken us from a 16.4 million bales shortfall in the 2009/10-season to a 15.4 million bales surplus in 2011/12.

Had it not been for the aggressive buying by the Chinese Reserve, which removed an estimated 18 million bales from the marketplace this season, there is no telling how low prices might have fallen over the last eight months.

In a week from now, on May 10, the USDA will issue its first projection for 2012/13. Analysts seem to agree that there will be a substantial reduction in global output from the 123.1 million bales that were produced this season and we should also see a recovery in mill use from the current 107.7 million bales, which is the lowest number since 2003/04.

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