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Growers are expecting decent yields
25 Jun '10
5 min read
We are seriously questioning whether global ending stocks at the end of July are really going to amount to 49.6 million bales like the USDA currently suggests. We are particularly suspicious of the 18.6 million bales that China is supposed to have, considering the red-hot domestic market that pays prices of over 125 cents at the CNCE. The same goes for India, which is supposed to have 7.5 million statistical bales (9.6 million local bales) in inventory at the end of next month. It seems to us that global stocks are quite a bit lower than 50 million bales and that basically all of these stocks will be committed a month from now.
So where do we go from here? In an odd way the current inversion between current and forward values has discouraged hoarding and has helped to push remaining inventory into the marketplace. Although we will end this season with virtually nothing left for sale, the market seems to be focusing on the arrival of new crop, which is expected to gain momentum within a couple of months. Growers are expecting decent yields, which combined with the current high price level should produce nice profit margins, while merchants are eager to fill their offer sheets again. This has led to active forward contracting and the associated selling of futures by the trade, against which speculators have been accumulating long positions.
The trade still seems to have plenty of ammunition on the short side, especially if the market were to move above the 80 cents level, while speculators are becoming more reluctant to add to their longs since upside momentum has been stalling. We therefore believe that the market will face strong resistance above 80 cents, but we equally feel that there will be strong support in the mid-70s due to the ongoing tightness. If the market were to drop, grower selling would stop while mills would become more aggressive in booking their requirements. We therefore don't see the market going anywhere in a hurry and our best guess is for December to stay in a relatively tight range between 76 and 82 cents.
So where do we go from here? In an odd way the current inversion between current and forward values has discouraged hoarding and has helped to push remaining inventory into the marketplace. Although we will end this season with virtually nothing left for sale, the market seems to be focusing on the arrival of new crop, which is expected to gain momentum within a couple of months. Growers are expecting decent yields, which combined with the current high price level should produce nice profit margins, while merchants are eager to fill their offer sheets again. This has led to active forward contracting and the associated selling of futures by the trade, against which speculators have been accumulating long positions.
The trade still seems to have plenty of ammunition on the short side, especially if the market were to move above the 80 cents level, while speculators are becoming more reluctant to add to their longs since upside momentum has been stalling. We therefore believe that the market will face strong resistance above 80 cents, but we equally feel that there will be strong support in the mid-70s due to the ongoing tightness. If the market were to drop, grower selling would stop while mills would become more aggressive in booking their requirements. We therefore don't see the market going anywhere in a hurry and our best guess is for December to stay in a relatively tight range between 76 and 82 cents.
Plexus Cotton Limited
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