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Plexus Cotton market report

Jan '07
The market continues to follow a rather boring and predictable pattern, which is dictated by the AWP/Futures spread. After the two measures were ratcheting higher during December, they have now gone into reverse, with the AWP going to drop another 165 points as of tomorrow, from 45.90 to 44.25 cents.

Since the daily rate of 43.90 cents points even lower, mills are in no hurry to change their hand-to-mouth pattern as they expect physical prices to weaken further.

However, things are not quite that simple, at least in the case of US cotton. The fact that the AWP/futures spread has dropped back below 10 cents has once again shut the door to loan cotton.

As of Tuesday, only 4.4 mio running bales have so far been freed from the loan, and with the AWP trending lower this number is not likely to change in the near future. It will take a spread of around 1150 to 1300 points, depending on the location, for US cotton to compete in the international marketplace.

What is also preventing the AWP/futures spread from widening beyond a certain point is the fact that loan cotton can be turned into certificated stock at less of a spread than what's required on a CIF sale.

In other words, the board pays a better net price than foreign mills do and therefore we do not expect this spread to widen to more than 1100 points anytime soon, especially with the March notice period approaching, which means that the cost of delivery becomes a bit cheaper every week.

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Plexus Cotton

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