NY cotton futures loses previous week's upside momentum

For the first two months of the 2012/13 season, August and September, China has already imported 568’000 tons (2.6 million bales), which is over 100’000 tons more than at the same time last season. In addition to that China continues to import yarn at double the pace of last year, with August and September yarn imports combining for about 250’000 tons (1.1 million bales).

At the same time the Chinese Reserve continues to siphon off domestic cotton at a rapid rate. Last week alone the Reserve procured 1.8 million bales, which brings the total since the beginning of September to about 6.8 million bales. Total Reserve stocks are now estimated at around 26 million statistical bales. This begs the question as to what China’s intentions are in regards to its cotton policy? By stocking away high priced cotton and continuing to let cheap cotton and yarn come in, China is acting in support of world prices.

But to what end? We feel that China will eventually surprise us with a major policy shift that steers farmers towards food crops at the expense of cotton. This can be achieved by lowering the support price for cotton while at the same time increasing it for food crops. Just recently the NDRC announced a nearly ten percent increase in the support price for wheat, a clear indication as to where China’s priority lies!

So where do we go from here? With the spot month once again approaching ‘fair value’ and with tenderable grades still in somewhat limited supply, it will take pressure from the cash market to open the downside in the futures market. This pressure may come from the US crop itself or from outside markets like India, but we are probably still several weeks away before the weight of the crops gets big enough. Many traders feel that while the December contract may escape this pressure, March may later on turn into a bottomless pit.

For this to happen we would need to see December’13 fall apart, which is not likely given the already extreme ratio to new crop soybeans and corn. We believe that any price analysis needs to start with December’13, from which we can deduce the price for current crop futures by allowing for a maximum discount of full carry.

For example, if December’13 were to hold at 75 cents, then March would probably not trade much lower than 67/68 cents, and so on. We therefore feel that the market will remain in its broader trading range between 65 and 77 cents, with the 71-72 cents level as the current center of gravity.

Plexus Cotton Limited