Bullish piece in cotton market

08 May '09

6 min read

This will give these spec funds free reign over the next few weeks. If they decide to put more money into commodities and cotton in particular, the price will go up and there is absolutely nothing the trade can do about it. To make matters worse, the trade may actually fuel the rally further if some of the shorts get forced out of positions due to cash issues.

We don't expect speculators to back off unless something adverse happens in the outside markets. Stocks and commodities had a very nice run lately, which has led to a more optimistic sentiment among investors and that has brought some of the 'mattress money' back into the various markets. Whether this will last remains to be seen and the short's best hope for a break lies in a bearish reversal of these markets.

Next Tuesday the USDA will give us its first detailed look at the 2009/10 season, when it releases its country-by-country supply/demand numbers. While it is still early for such estimates, the trend seems to be one of lower world production and stabilizing world consumption, which could result in yet another output gap next season. In regards to consumption we get the impression that it has been stronger than most people have given it credit for. Back in November many traders feared that consumption would fall by 20 percent or more. While that may have been true for a short period of time as the textile pipeline got emptied in reaction to the financial crisis, the annualized drop in consumption seems to be much more benign.

When we look at the latest import statistics for cotton textiles here in the US as reported by OTEXA, we notice a drop of around 5-6 percent when we compare the twelve-month periods leading up to February 2008 and February 2009. Add to that the drop in domestic mill use and we may have a total reduction of perhaps 8-10 percent. Europe has probably experienced a similar drop, but in Asia the situation is looking more promising. Overall it seems to be fair to say that the drop in cotton consumption at the retail level may have been overestimated and that things are not quite as bad as originally feared.

So where do we go from here? Speculators are firmly in control of the futures market and it will be up to them to decide what happens next. Unless these specs are given a reason to sell (outside markets?) we should expect this bullish trend to continue. The cash market is still lagging by several cents but it too has displayed a firmer tone recently.

While there are still plenty of stocks available in various origins, the situation in the US is getting tighter as there are just 5.8 million bales for sale, and we are only in early May! With the supply/demand outlook for next season not expected to provide a bearish reason, we wonder what it will take to stop this bull market in its tracks.

There may be occasional voids of buying that could lead to some dips, but the market can afford to drop several cents without violating the uptrend line and these dips will likely be well supported by shorts eager to get out of harms way.

Plexus Cotton Limited

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