NY futures rebound this week

03 Apr '10

5 min read

The highest crop the world has ever produced was 121.95 million bales in 2006/07, with the US contributing 21.6 million bales at that time and the rest of the world producing 100.35 million bales. The highest output the rest of the world has achieved so far was 100.7 million bales in 2007/08. Now, if the US produces 17 to 17.5 million bales based on the current acreage estimate, then the rest of the world would basically have to match its highest ever output to get to the 117-118 million bales that we believe are needed to catch up to consumption. While this is certainly possible, it takes a favorable growing season to do so and for this reason the market is likely to remain on edge until late summer.

Apart from evaluating supply and demand numbers, there are several other factors we need to consider as we head into the coming season. We believe that there is a good chance for interest rates to rise as it becomes increasingly difficult to fund these massive deficits. If that were to happen it would likely spur inflation and lift commodity prices as a result of it. While the US dollar may get an initial boost from higher rates, we believe that over time the dollar will depreciate further because the Fed will be forced to monetize part of this increasing debt burden. Higher energy prices are another factor to watch out for. It is no coincidence that crude oil is back above 85 dollars even though we are still in a recession in the US and Europe. Although we won't run out of oil for many decades, the problem is that the daily production rate will not be able to keep up with rising global consumption as many of the world's major oil fields are past their halfway mark and flow rates are decreasing.

So where do we go from here? The market is currently in the middle of a five week sideways trend, with solid support above 78 cents and tough resistance near 83 cents. Given the renewed buying interest by speculators and the massive net short position that the trade needs to deal with we believe that the odds favor a breakout to the upside at some point.

New crop is still too early to call, but based on the factors mentioned above we believe that new crop values will remain well supported as well.

Plexus Cotton Limited

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