NY cotton futures continue precipitous slide last week

29 Sep '14

5 min read

Since 2011/12, China has basically imported every bale the ROW produced in excess and this is finally coming to an end with China’s determination to reduce its massive stockpile.

The latest USDA report estimates the gap between the ROW surplus of 12.9 million bales and Chinese imports of 8.0 million bales to be at 4.9 million bales.

But a combination of a slightly larger ROW crop, a small reduction in Chinese cotton imports and a somewhat larger reduction in Chinese yarn imports could potentially lead to an increase in ROW stocks of as many as 7 or 8 million bales this season.

In a year when global imports are expected to drop by 5.8 million bales, such an inventory increase would certainly be felt.

Although the US loan and India MSP offer some support mechanisms, this situation will eventually lead to additional price pressure next spring or at a minimum force full carrying charges between March, May and July in order to entice someone to hold these excess stocks.

In view of the bearish fundamentals going forward, especially after the turn of the year, it may seem somewhat surprising that the trade would be such a strong buyer in the futures market last week, buying 1.3 million bales net between September 17th and 23rd.

Since about two-thirds of this buying consisted of new long positions, one possible explanation is that merchants buy futures in lieu of cash cotton, which at these low price levels is not abundantly available yet and that they will later on swap these futures out for cash.

The danger for the shorts, many of which consist of speculators, is that they are betting on a bearish long-term scenario that is still a long while from being realized.

The nearby situation is still very tight, as growers are reluctant to sell their crop, which by the way is still mostly in the field and exposed to weather.

West Texas saw another round of heavy rain this week and according to the long-range forecast this pattern is not going to change over the next month or two.

In other words, large parts of the US crop are still an uncertainty at this point, especially in regards to quality.

While the feeling is that this bear market has a lot further to go, December is certainly not the appropriate month to be short in! (AR)

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