News Flash

NY futures trade in volatile fashion this week

23 Oct '10

5 min read

First of all, we don't really know from what level we need to start discounting mill demand. Are we currently at 120.8 million bales as the USDA numbers suggest or did we underestimate demand altogether since the financial crisis? You may remember that in early 2008 we were looking at global demand projections of over 128 million bales for the 07/08-season. Based on what we have seen in China over the last two seasons, there is a distinct possibility that demand has been a lot stronger than 50 million bales. Let's not forget that China was already using 51 million bales three years ago!

Secondly, even though we may see mill demand decline by a few million bales, Chinese Reserve buying is more than likely to offset its potential impact. Since May 2009 the Chinese Reserve has auctioned off around 16.5 million bales of its stocks and will need to replenish most of it whenever it gets a chance to do so. We therefore expect demand for US exports to remain strong well into next season.

So where do we go from here? Cash prices are the guiding light in this confusing market and as long as they remain strong, the futures market won't fall apart despite all the spec selling there might be. If December becomes too cheap in relation to the physical market as we approach its notice period next month, the trade will simply use it to source cash cotton. We feel that as a rule of thumb the futures market should trade no lower than 14 cents below what mills are willing to pay for MOT high grades. If that price is 130 cents, then futures are likely to stay above 116 cents, and if physical prices move higher, the futures market will adjust accordingly.

Although physical prices paid for US cotton may seem expensive at current levels, they are still relatively cheap compared to what Chinese mills are paying. CC-index, the benchmark for Chinese prices, stood at just under 170 cents, while the last installment of the government auction was fetching prices above 176 cents and the November futures contract traded above 180 cents.

At what point this powerful bull market will reach its top is still anybody's guess, but this week's downward revision of the Chinese crop by the CCA to just 29.4 million bales (2.1 million below the current USDA estimate) and the damaging hail and rainstorm that moved through West Texas this evening are only adding further fuel to the fire.

Plexus Cotton Limited

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