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'US Dollar' wild card in present times for cotton markets

31
Oct '08

NY futures continued their slide this week, with December dropping another 399 points to close at 45.09 cents, while March fell 414 points to close at 49.18 cents.

A rapidly declining AWP paved the way for further declines in the futures market. In fact, the USDA today implemented an additional adjustment that was provided for under the new Farm Bill, which means that instead of having the AWP at 41.68 cents next week as calculated under the current formula, it will now be set quite a bit lower at 40.12 cents.

Compared to the 44.62 cents we had in force this week, the AWP will therefore see a drop of 450 points starting tomorrow and this may explain some of the weakness in today's session.

This additional adjustment in the AWP will likely reinforce the negative feedback loop between NY futures and the AWP that has been in force for a while. There are currently two US quotes among the five cheapest that make up the A-index calculation and these quotes will see another steep drop tomorrow. The other three quotes currently used to calculate the A-index are Pakistan, Brazil and India. Pakistan is likely to follow the US quotes down due to its dire need for foreign exchange, while Brazil and India may put up some resistance. However, they too will ultimately be forced to lower their demands if they want to sell any cotton. In other words, it doesn't look too rosy for the futures market at the moment because there is no bottom in sight for the A-index/AWP.

After two decent export sales reports in the previous two weeks, last week's sales of just 58'500 running bales of Upland and Pima were disappointing, especially considering how cheap prices have become. For the season, total commitments now amount to 6.75 mio statistical bales, which is still about 0.5 mio bales ahead of last season, but the outlook for additional sales is not encouraging at the moment.

Particularly worrisome is the fact that 41'300 running bales were canceled last week, most of them in China. The largest buyer of US cotton in recent years will likely see a sharp drop in mill consumption this season and since its crop is at least as big as last year, Chinese imports are going to slow down considerably from here on forward.

With the US crop expected to yield around 13.8 mio bales and with beginning stocks at 9.8 mio bales, total supply this season amounts to around 23.6 mio bales, of which 6.75 mio bales has so far been committed for export and around 4.5 mio bales will be taken up by domestic mills.

This leaves about 12.35 mio bales available right now, which depending on the vantage point can be seen as negative or positive. Pessimists stress the fact that exports are grinding to a halt and that it will therefore be difficult to work these supplies down. Optimists on the other hand may point out that 11.25 mio bales out of a 13.8 mio bales crop are already committed and that we are only in October, with the bulk ofthe marketing year still ahead of us. If just another 2.5 mio bales were sold and shipped along with existing commitments, then we would already be back at the beginning stock level.

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