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China expected to import 4mn more cotton bales in 20007-08

May '07
Wow, just when u thought it might be safe to go long, the USDA drops a bearish bomb that allowed the specs another selling opportunity which set a new life of contract low for the N'07 at 47.58 c/lb. We managed to rebound firmly off the lows, but the N'7 still lost 92 pts to settle at 48.11.

The good news is we managed to close within the 48/49 cent range we have been trading in the last 5 days, but we still have that gap of 1 pt. at 49.25 above the market that just does not want to go away. The USDA made some significant adjustments to'05 beginning stocks and lost bales that increased the Chinese ending stocks for 06/07 by 2.8 million bales alone.

After a couple of other changes that we were expecting, which offset each other, we ended up with ending stocks growing to 55.41 million bales or a stocks to use of over 45%. What's even scarier is the U.S. is now over 52% S-U-R ratio for 06/07 compared to 25% in 05/06. This is the biggest explanation for the weak performance in NY and why we continue to struggle even at the levels.

However, the 07/08 estimates were much friendlier and almost seemed like an attempt to draw attention away from the 3 million bale change to old crop stocks. Most notable was the 17.5 million bale export number for the U.S. in 07/08 which is a 4 million bale increase from this season and China is expected to import 4 million more bales in 07/08 as well. We will have to see if China can save the day or we are stuck a bit longer in this trading range for the spot month between 46/56.

Technically, the market has lost any action that was built in the last 5 trading sessions moving sideways. Closing below the 9 day moving average and leaving the gap is starting to show signs that the N'7 will have a real struggle to break out above 50 c/lb. Specs still have room to sell and the trade are unable to stop the slide lower.

Click here to view graphical presentation:


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