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Sharp correction ensues in NY cotton futures

Jul '09
In China, ending stocks are estimated to be about the same at the end of July as last year according to the USDA, namely around 4.3 million tons or 19.9 million bales. Stocks in private hands seem to be mostly exhausted, with supplies currently coming from government reserves and imports. The current government auction has been a success, as it is estimated that all 1.5 million tons will have found a home by the end of August, at prices that average above what the government paid for it. Based on circumstantial evidence we feel that the USDA ending stocks number for China may be a little on the high side and that there is absolutely no price pressure to be expected from these inventories.

The same goes for India, where the USDA believes that stocks will amount to 10.7 million statistical bales, which equals about 13.7 million local bales. The bulk of these stocks is owned by mills and is needed to tie them over to new crop, which will arrive late this year. Neither these mill stocks nor the few million bales still held by the government are expected to exert any price pressure on the market over the next few months.

The next on the stock list is the US, which will end the season with around 6.2 million bales, of which less than 3.0 million remain unsold. As in the case of China and India, these US remnants are not expected to put much pressure on the market over the summer months. Number four is Brazil, which transitions to the next marketing year with about 5.0 million bales in inventory. But here too we do not foresee any bargain prices to show up anytime soon.

What we realize as we move down this ending stocks list is that there is very little cotton that itches to be sold. Central Asian, African and Australian cotton is still available in some volume, but quantities are not burdensome enough to lead to any major price pressure.

So where do we go from here? The market has found decent technical and fundamental support near 58/59 cents. Whether this support will hold remains to be seen! We are a bit uneasy to see the market so close to this 5 ½ months trendline, for if it were broken we could see spec longs bail out of their recently established positions. For now we shall give the market the benefit of doubt and expect it to establish itself in a range between 58 and 64 cents.

The longer term outlooks points to a sideways trend as well. Most of the crops around the globe seem to be in good shape and we will probably see the USDA raise world production in its August report. We would not be surprised to see world output at 108 to 109 million bales (currently 106 million), which would cut the current production gap of 6.7 million bales by a substantial margin and lead to a fairly balanced supply/demand situation in the coming season.

Plexus Cotton Limited

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