New cotton crop offers remain uncompetitive

28 Aug '09

6 min read

When we look at the current composition of the A-index, which provides the base values for the AWP calculation, we notice an unusually wide difference of seven cents between the five cheapest components that make up the index. Pakistan is by far the cheapest at 57.50 cents, followed by Tanzania (60.00), Brazil (63.75), India (64.50) and Mali (64.50). There are another five origins following between 64.50 and 65.25 cents.

Pakistan and Tanzania are considered lightweights in terms of exports and will not set the price trend throughout the season. The USDA currently forecasts both countries to export just 300'000 bales this season, although in the case of Pakistan that number is likely to go up. If we were to exclude Pakistan and Tanzania from the calculation and just focused on heavyweight exporters instead (India, Brazil, West Africa and CIS), the current A-index would calculate 64.40 instead of 62.05 cents and the AWP/futures spread would be even narrower. When we look at who among these heavyweights could potentially lead prices lower, it would probably have to be India. Brazil has a strong domestic price, West African values should remain relatively firm at origin due to smaller crops and Uzbekistan is more of a follower than a leader.

Again, US new crop (once harvested) will not be in the picture for a while because it first needs to escape from the loan, which in turn will depend on what competing crops are up to. How aggressive India will be with its exports it still up for debate, because even if there was a large potential export surplus we might still see the Indian government stick to the policies of last year, when it instituted a minimum support price and took supplies off the market, a strategy that ultimately proved to be quite successful.

It will be interesting to see how this causality dilemma plays out this season. We see it difficult for US new crop to enter the game, and without the US competing there will be less pressure on others. Only once a big block of US cotton has been flushed out of the loan will the dynamics change, and for this to happen we will probably need to see a rally in the futures market first.

So where do we go from here? Based on the technical picture the market should work lower, but the trade may prevent this from happening. We feel that the market has value below 57 cents and should be bought on a scale down basis. Other than some old crop supplies that still need to find a home we don't expect to see any pressure on the market until the major crops are harvested. At the same time there is no reason for the market to run away to the upside either. We therefore stick to our prediction of a trading range between 55 and 65 cents for the time being.

Plexus Cotton Limited

More Textiles News - United States Of America...