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NY Futures March contracts undergo steep correction

08
Jan '11
NY futures had a mixed performance since our last report two weeks ago, as March traded down 690 points to close at 141.22 cents, while December rallied 517 points to close at 100.97 cents.

After making an all-time high of 159.12 cents just before Christmas, the March contract fell for a few sessions thereafter but has since transitioned into a sideways pattern, closing the last 9 sessions in a relatively tight range between 140.43 and 145.76 cents.

With the spot month calming down, the extreme backwardation has started to reverse as well, as the March/July inversion retreated from over 3300 points to currently around 1300 points, while the March/December inversion went from over 6200 points to a little more than 4000 points. In fact, while March has been going through a steep correction, December closed at a new contract high of 100.97 cents.

Bearish commentators have been pointing out that export business has slowed considerably in recent weeks. While this is definitely the case, the bullish camp is quick to counter that this is mainly due to a lack of available supplies and that sellers are in no hurry to discount prices on their remaining inventory.

We believe that both sides raise valid points and that's probably why the market has been relatively steady over the past two weeks. While most consuming markets are currently well supplied with cotton, as they are able to draw from their own crops as well as imports, it doesn't change the fact that from a statistical point of view we are in one of the tightest seasons ever and that many origins have already committed the bulk of their crops.

Take the US for example! At the end of December, export commitments for the current marketing year amounted to 14.5 million statistical bales, which combined with the 3.6 million bales that US domestic mills require adds up to 18.1 million bales. In other words, the 2010/11 US crop - currently estimated at 18.27 million bales by the USDA - has basically been committed!

This means that statistically speaking, any additional sales will have to come out of the relatively small beginning stock of 2.95 million bales. Since there are already 2.0 million bales committed for next marketing year (beginning on August 1) and domestic mills will need around 1.0 million bales between August and October to tie them over to new crop, the US is for all practical purposes sold out.

Although mill buying is currently very sporadic and selective, offers nonetheless remain at elevated levels and there have been no noticeable price concessions on recent sales. The A-index was still at over 173 cents this morning, while the China Cotton Index converted to 188 cents. In other words, these two physical price measures are still at a considerable premium over NY futures.

Until about six months ago, the A-index traded at a 5 to 8 cents premium over spot futures, while it is currently at a 30 cents premium, reflecting the tight situation in the physical market. Therefore, unless we see a significant drop in cash prices, it will be difficult to envision a much lower NY futures market.


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