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The Rupp Report: The Cotton Supply Is Tightening

Jürg Rupp, Executive Editor

The situation in the cotton trade is still a big question mark. In the last few weeks, the heat is still on, and it's time for another update. As always, the Rupp Report appreciates information from individuals as well as Plexus Cotton Ltd., the U.S. Department of Agriculture (USDA) and the Bremen Cotton Exchange.

On March 24, Plexus reported: "NY futures rallied again this week, with May gaining 1670 points to close at 208.82 cents, while December advanced 685 points to close at 127.81 cents. Even though the futures market has remained highly volatile, trading action has become more two-sided [and] resistance above the 2-dollar mark has been increasing. ... Many traders were expecting to see another negative sales number for current crop due to rumored cancellations, but instead the report showed a net increase of 333,000 running bales for the current marketing year as well as 228,200 running bales for the coming season. ... For the season, total commitments now amount to 16.0 million statistical bales, of which 9.0 million have so far been exported."

Can World Production Increase?
Plexus continued: "Some prominent traders and analysts believe that world production could rise to somewhere between 130-135 million bales. This would eclipse the previous record of 121.8 million acres set in the 2006/07 season ... . However, a lot will have to go right for production to jump by some 13-17 percent over the current season."

However, Plexus further noted that "a crop of over 130 million bales does not automatically mean that stocks would grow back to depressing levels, because we believe that demand would be there to absorb most if not all of this increase in output."

Another scenario is frightening, as Plexus noted: "If global per capita demand for cotton was as high as US per capita demand, the global consumption would amount to roughly 470 million bales or about four times the current level."

No Relief
On March 31, Plexus reported: "NY futures ended the week mixed, as May gave up 850 points to close at 200.32 cents, while December rallied 469 points to close at 132.50 cents. ... December was challenging its contract high of 135.76 cents. May seems to be in a topping process, while December has been getting plenty of support from bullish reports (planting intentions, export sales) as well as an announcement by the Chinese government that its Reserve would procure cotton at the equivalent of around 137 cents next season. As a result we have seen a narrowing of the steep inversion between current and new crop, from over 100 cents on March 7 to currently around 68 cents, and this trend is likely to continue.

"Today's US export sales report was a good example of the different dynamics that exist between current and new crop. While nearby commitments dropped by 38,800 running bales net ... , sales for next marketing year increased by 317,900 running bales. For the current season total commitments now amount to around 15.9 million statistical bales, of which some 9.5 million bales have so far been exported. Total commitments for the 2011/12 marketing year are now just shy of 5.0 million statistical bales."

Where Are Some 10 Million Bales?
Plexus further analyzed the situation related to U.S. cotton: "When we look at latest US supply/demand picture, we have total supply for this season at around 21.1 million bales (based on the final ginnings report which has the US crop at only 18.1 million bales). From this number we have to deduct export commitments of currently 15.9 million bales and domestic mill use of 3.6 million bales ... . However, since export commitments for August onward shipment are already at 5.0 million bales and domestic mill use will likely amount to some 3.8 million bales next season, there is already a 'statistical deficit' of around 7.2 million bales by the end of March. This number is likely to grow to well over 10 million bales by the time the coming crop gets harvested. In other words, the first 10 million bales of new crop will likely have a home by the time they are ginned and it may therefore take quite a while until any crop pressure has a chance to develop."

Looking forward, Plexus believes "the realignment process between current and new crop prices will continue. May and July futures may be able to hold their own due to the fact that there are still 4.75 million bales that need to get fixed by the middle of June."

Stocks At Historically Low Levels
Also, as the USDA's Foreign Agricultural Service reports in "Cotton: World Markets and Trade," March 2011: "With ending stocks currently estimated to remain at historically low levels, prices are likely to remain high for the next season. ... China's ending stocks have continued to tighten, indicating strong import demand going forward. With stocks already low, and the state reserve depleted, the gap between China's production and consumption will have to be filled by more imports. ... In major exporting countries aggregate ending stocks are estimated to be slightly higher, but barely offset the forecast decline in China's stocks. ... The potential for continued export restrictions in India (the second largest exporter) raises concerns about the international availability of their stocks which adds greater uncertainly to an already unsettled market."

Concerns About Raw Cotton Supply
That's why the European Union is also concerned about the situation: Alberto Paccanelli, the President of the European Apparel and Textile Federation (EURATEX) recently stated: "The steep growth of emerging economies like China, India or Brazil is creating increasing pressure in the markets leading to a lack of availability and price increases for the major textile raw materials. This problem is aggravated by the unilateral and restrictive measures taken by certain countries, like India, to limit exports of critical Raw Materials or Semi-Finished Products — this is the case of Cotton Fibre and Cotton Yarns."

April 12, 2011