NY cotton futures advance higher this week

11 Oct '14

6 min read

In some instances government programs are providing a backstop against further losses, which has taken away some of the necessity to hedge in the futures market. The four largest cotton producers in the world, which account for over 72 percent of production, all have some form of grower support kicking in at the moment.

In the US producers benefit from the loan mechanism, in India the government is buying cotton at a minimum support price, Pakistan just implemented a support price for seed cotton and China announced massive subsidy payments to growers, while its large stockpile is not available for export.

These government support programs combined with an empty pipeline that is only slowly starting to fill up has at least temporarily halted this brutal decline, during which December has lost over 20 cents since early May.

However, the supply bottleneck isn't going to last forever and government support won’t make these bales disappear and only delays their impact on the market.

Therefore, there is a need to look at the market in two time frames. The first one encompasses the next 2-3 months, during which it may prove difficult to buy attractively priced cotton, particularly high grades, which is the main reason why US export sales will continue to ‘disappoint’ in the foreseeable future.

Nevertheless, prices may still firm up, as shippers have no other choice but to pay up in order to cover nearby commitments. Weather plays of course a crucial role in all this, since it could further delay and/or reduce the availability of premium grades.

The second time frame starts around December or January, when the outcome of the Northern Hemisphere crops will finally be known, both in terms of size and quality. Assuming that there are no major weather related setbacks, supply pressure should eventually start to build and keep a firm lid on the market for some time to come.

Global supplies made up of beginning stocks and crop will amount to around 218.3 million bales this season according to the USDA, while global mill use is only a little more than half of that at 112.1 million bales.

Since China is no longer in hoarding mode, it is quite difficult to envision anything but a bearish scenario in the longer term.

The bear market has hit the ‘pause button’, as traders are waiting for new crop supplies to finally bail them out of this bottleneck situation.

Unfortunately the weather is not cooperating in the US, as another round of severe storms is expected to hit the Delta and Southeast early next week, which will not only delay harvest further, but has the potential to impact quality as well.

Combined with an improving technical picture this could extend the current counter trend move into the mid-to-high 60s.

However, the next USDA report will probably remind everyone that the longer-term outlook remains negative and that the trade should use rallies to bolster its short position. (AR)

Fibre2fashion News Desk - India

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