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News Flash
NY cotton futures under new pressure this week
05 May '12
6 min read
Most agree that there is still going to be a production surplus in the coming season, but the big question is of course whether it will be 3, 7 or 11 million bales?
There is little doubt that global acreage will decline by some 5-10%, as farmers in China, India, the US and many other places are switching some of their acres to food crops. However, while China and India will likely see smaller crops as a result of this acreage drop, the same is not true for the US.
Despite planting possibly as few as 12.5-12.7 million acres (vs. 13.2 million planting intentions on March 30), better climatic conditions are likely going to lead to lower abandonment as well as higher yields. This is especially true in the case of Texas, which experienced a disastrous growing season last year.
It is therefore quite conceivable that the US could end up with a crop of 18.0 million bales or more, which compares to a 15.6 million bales crop in the current season.
If origins outside the US were to produce 8% or 8.6 million bales less next season and if the US saw an increase of 2.5 million bales, global output would amount to around 117 million bales. Even if demand were to recover to around 111 million bales, we would still end up with a seasonal surplus of around 6 million bales.
Under such a scenario it would be difficult to imagine firmer prices in the coming season, especially since the US has sold just 1.0 million bales for shipment August onwards so far. In other words, there is a lot of cotton that has yet to be marketed and with mills buying only for nearby shipment, producers should feel the pressure this fall.
So where do we go from here? With India bringing some additional cotton to the market and with US export sales not making any headway at the moment, a potential short squeeze in the July is becoming less likely. This could still change if China were to use new quotas to mop up existing supplies over the next couple of months.
However, with July currently trading nearly 300 points above December, we could also run into a situation in which current crop stocks get dumped as we make the transition from July to December, because it doesn't make much sense to hold on to unsold stocks in an inverted market, especially if the outlook for new crop prices is bearish.
July feels unpredictable to us at the moment, as there are a variety of factors that could either pump it or dump it and we therefore prefer to focus on December, where we still subscribe to a slightly bearish view until proven otherwise.
There is little doubt that global acreage will decline by some 5-10%, as farmers in China, India, the US and many other places are switching some of their acres to food crops. However, while China and India will likely see smaller crops as a result of this acreage drop, the same is not true for the US.
Despite planting possibly as few as 12.5-12.7 million acres (vs. 13.2 million planting intentions on March 30), better climatic conditions are likely going to lead to lower abandonment as well as higher yields. This is especially true in the case of Texas, which experienced a disastrous growing season last year.
It is therefore quite conceivable that the US could end up with a crop of 18.0 million bales or more, which compares to a 15.6 million bales crop in the current season.
If origins outside the US were to produce 8% or 8.6 million bales less next season and if the US saw an increase of 2.5 million bales, global output would amount to around 117 million bales. Even if demand were to recover to around 111 million bales, we would still end up with a seasonal surplus of around 6 million bales.
Under such a scenario it would be difficult to imagine firmer prices in the coming season, especially since the US has sold just 1.0 million bales for shipment August onwards so far. In other words, there is a lot of cotton that has yet to be marketed and with mills buying only for nearby shipment, producers should feel the pressure this fall.
So where do we go from here? With India bringing some additional cotton to the market and with US export sales not making any headway at the moment, a potential short squeeze in the July is becoming less likely. This could still change if China were to use new quotas to mop up existing supplies over the next couple of months.
However, with July currently trading nearly 300 points above December, we could also run into a situation in which current crop stocks get dumped as we make the transition from July to December, because it doesn't make much sense to hold on to unsold stocks in an inverted market, especially if the outlook for new crop prices is bearish.
July feels unpredictable to us at the moment, as there are a variety of factors that could either pump it or dump it and we therefore prefer to focus on December, where we still subscribe to a slightly bearish view until proven otherwise.
Plexus Cotton Limited
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