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Cotton closes higher for the 8th time in last nine weeks

11
May '09
Much of the Delta and Mid-south was inundated with rain this weekend insuring no field work in much of Ark, Miss, Ala or Tn. The system seems stuck and looks to stretch from Okla to Alabama for Monday. Instead of being vulnerable after the extremely fast finish one week ago, cotton prices built on what looked like a fluke spike and moved higher on the back of a sharp drop in the US dollar.

A series of "bad but not as bad as expected reports" fostered the belief that the bottom of the recession might be in sight. Grains, cotton and the stock market all answered the call with rallies. Cotton closed higher for the 8th time in the last nine weeks. This week the popular July/Dec spread seemed to level out. It averaged around 250 for the week. However, over the last three weeks, the average is around 325 points. Over the last three or four months the spread has averaged well over 400 points.

The perception remains that we could actually end the crop year with tight supplies of better grade cotton. Last weeks export sales report, for the week ending April 30 were 47 percent below the previous week and 55 percent below the prior 4-week average. When prices bottomed nine weeks ago, the US growths were the cheapest in the world. We are now not only no longer in the A index, the cheapest US growth, is over four cents above India's quotes. One of the most important USDA reports of the year comes Tuesday morning at 7:30 am.

This report give us a first glimpse of what USDA economists and analysts foresee for the for 2009/2010 season. This is the first time their forecast for both world exporters and world importers of cotton has been made available in the May report. The price outlook for 2009/10 is for the most part, dependant upon the success of Chinese stimulus package. Global consumption of cotton was reduced as the crisis in world financial markets cut consumer spending and purchases of textiles.

After all it is the consumer who has final say. All major cotton exporters: the US, Central Asia and the African French Zone in the northern hemisphere and India, Brazil, Australia in the southern hemisphere have a direct stake in China's economic recovery. In fact, they are dependant on it. Domestic consumption in the US has been so greatly reduced over the last ten years, the US must now export over 70 percent of its production. China is the worlds largest producer of cotton, producing roughly one third of the world's cotton crop.

However, more importantly, they are also the largest consumer. Despite the fact that the Chinese GDP has continued to stay at a positive but slowed rate they still accounted for three-fourths of the drop in world consumption due to the sharp slowdown in textile exports So it is easy to see how significant their economic recovery is and how their producers balance acreage between cotton and grains. China needs roughly 42 percent of the world crop to keep the mills operating and are the US cotton industry's best customer by far.


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