NY Cotton futures display mixed trends this week

28 Mar '14

6 min read

The US balance sheet got even tighter this week after the USDA released its final ginning report for the current season. There were a total of 12.87 million statistical bales ginned this season, of which 12.23 million bales were Upland and 0.63 million bales were Pima.

This means that compared to last season the Upland crop has dropped by a whopping 4.27 million statistical bales! Based on this report we have to assume that US ending stocks will have to be lowered by 0.3 million to 2.5 million bales, unless the USDA changes its export number.

So far US exports remain on course to meet or exceed the 10.7 million USDA estimate, as last week’s sales and shipments were again above the average needed to achieve this goal. Net new sales for the current marketing year amounted to 79’000 running bales of Upland and Pima, while commitments for August onwards rose by 78’600 running bales.

Once again there were over 20 markets participating in all these transactions. Total commitments for the season now amount to 9.8 million statistical bales, of which 6.8 million have so far been exported.

According to our calculation the unsold balance in the US is currently at just 1.6 million statistical bales. We arrive at this number by taking into account 1.0 million bales for domestic mill use between August and October, and we further assume that 0.8 million of the 1.2 million in export commitments for 2014/15 will be shipped from existing stocks.

Here is another interesting thought - if the US were to ship just 200’000 bales a week and domestic mills continued to use 300’000 bales a month, then every last bale of US cotton would be gone by the end of September! Since the July/Dec inversion discourages the rationing of remaining supplies, the US may actually clean out its cotton warehouses before new crop comes off the field.

So where do we go from here? In trying to make some sense of the market, we need to split it into three separate parts. The first one concerns current crop, with May and July currently trading at a steep inversion to new crop.

This is the result of a) the extremely tight stock situation in the US and most other origins outside China, and b) the market structure that has caught a lot of trade shorts on the wrong foot. Before a price brake can occur, the shorts will probably have to buy their way out first.

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