The December contract has basically been flatlined near the 70 cents level for the last 7 sessions, holding against a generally bearish sentiment thanks to decent physical demand for nearby shipment. There is still hardly any crop pressure evident from foreign growths, with the three largest crops outside the US (China, India and Pakistan) all seeing their domestic prices hold relatively firm at the moment.
In China, purchases by the Reserve continued at a brisk pace and have now reached 10.0 million statistical bales. Last season it took until January to reach this threshold! It is not really surprising that farmers are turning their cotton over to the government, since the CC-index (delivered mill price for Type 328) is around 14 cents lower than the government support price and mills have found ways to get their hands on more affordable supplies by importing cotton and yarn. However, what puzzles traders and analysts is that there is no end in sight to the current modus operandi, which could mean that Reserve stocks may grow to 35 million bales or more, while imports of cotton and yarn may well exceed current projections and thereby tighten the balance sheet in the rest of the world.
India, the second largest cotton producer after China, saw some of its crop washed away after Cyclone Nilam inundated parts of Andhra Pradesh. Although several hundred thousand bales may have been lost in the affected areas, the rains may prove beneficial to other parts of the state, thereby negating the storm’s overall impact on the crop. With arrivals being slower than last season and with local mills operating well thanks to good yarn orders from China, it may take another month or two before Indian offers become competitive on the export front.
Pakistan, who until recently had high hopes for a bumper crop, has woken up to a reality of lower than expected yields and crop estimates have therefore been scaled back by about a million local bales. Since domestic prices have risen above the international level, Pakistani mills – who also enjoy decent yarn demand from China – have become quite active on the import front over the past couple of weeks.
This brings us to the United States, which thanks to the above-described scenario remains the most attractively priced bulk exporter for now and has done a fair amount of business lately. Today’s US export sales report revealed that a total of 276’400 running bales net of Upland and Pima cotton were sold last week, with China once again being the largest buyer at 129’600 bales. Turkey, which has some quality issues in its own crop, took advantage of cheap US prices by buying 65’000 bales, while Pakistan was in third place taking 30’600 bales. For the season, total export commitments now amount to around 6.6 million statistical bales, of which only some 2.1 million bales have so far been shipped.
Although the US is not facing much competition from foreign competitors at the moment, there is still the possibility that a bigger than expected US crop could lead to internal price pressure. Most observes see the US crop in the 17.4-17.8 million bales range, with an outside chance to make 18 million bales thanks to record yields in parts of the Southeast. With export sales at only 6.6 million bales at this point and with domestic mill use at just 3.5 million bales, the US may still have some 11 million bales for sale. Placing all that cotton could prove to be a tall order unless China continues to be unexpectedly active on the import front.
So where do we go from here? At the moment NY futures still represent about ‘fair value’ near 70 cents, based on where physical cotton is being traded in the Far East. As long as export demand is maintained, the market should not move much from current levels. However, with the US crop coming in fast and furious after benefitting from several weeks of good harvest weather, daily classings of some 200-250k bales are now outpacing demand and this could lead to some price pressure as inventories start building up over the coming weeks.
The USDA report will likely set the stage for the market’s next move. We are looking for a higher US crop number, which may be offset by a drop in Pakistan. Consumption is already low enough, so no need to make it even more depressing. Surprises could come in the form of higher Chinese imports and a sharp downward revision in Indian stocks going back several seasons, which would lower global ending stocks. At any rate, we expect the market to come alive after several days of listless trading!
The above is an opinion. Plexus cannot be held responsible for its accuracy or otherwise.