The Rupp Report: Cotton Prices Not Forgotten
Jürg Rupp, Executive Editor
In late June, NY July futures rallied 1,859 points to 164.55 cents, while December closed 78 points lower at 119.40 cents. “It was a bizarre week in the futures market, because July and December seemed to move contrary to what their respective fundamental situation was suggesting,” noted Plexus Cotton Ltd. in its weekly Market Report.
In early July, futures and demand came under pressure: NY December futures dropped 507 points to 113.52 cents and there was concern the drop in demand might more than offset U.S. crop reductions. “Mill demand continues and to be only of sporadic nature and certainly not sufficient to absorb all the foreign stocks that merchants and growers would like to get rid of,” Plexus reported, recognizing a “striking difference” between the balance sheets of the United States and the rest of the world.
Plenty Of Cotton Available
The July 7 report stated that “there is still plenty of cotton available in the rest of the world, starting with the vast unsold supply in Uzbekistan and Turkmenistan, followed by positions in India, Brazil, Australia, Argentina and various African countries, which is where the current price pressure is coming from.” The prices remained volatile for weeks.
And, in early August: “NY futures were able to extend their recent gains, with December advancing another 235 points to close at 104.92 cents.
“The problem … with this trade net short in futures is that it is mainly ‘hedging’ long positions in foreign growths, such as Brazilian, Australian, Indian and African origins. [The US has] 7.4 million statistical bales in outstanding export commitments plus whatever shippers already sold to domestic mills.”
In the meantime, the International Cotton Advisory Committee (ICAC) reported: “The season-average Cotlook A Index reached a record of $1.64 per pound in 2010/11, twice as high as the 2009/10 average. However, the season-average A Index will decline in 2011/12, as an increase in production will replenish stocks.”
According to ICAC, “world cotton production is expected to rise by 8% to 26.9 million tons in 2011/12, driven by the high cotton prices received by farmers in 2010/11. Production will rise in most large producing countries, with the exception of the United States. Production could reach records in India and Australia. Despite a significant increase in U.S. planted area, severe drought conditions in Texas will not only increase abandonment but also limit yields. U.S. cotton production is forecast at 3.5 million tons in 2011/12, down 12% from the previous season.
“As a result of the surplus of 1.8 million tons expected in 2011/12, world ending stocks could rebound by 20% to 10.9 million tons. The global stocks-to-use ratio could recover from 37% in 2010/11 to 43% in 2011/12.”
A Retreat, However …
In late August, Plexus reported: “NY futures retreated … as December gave back 396 points to close at 102.99 cents. … Although the market managed to rally all the way up to 109.00 cents, taking out the 108.62 cents resistance level and filling a chart gap at 108.88 cents in the process, there wasn’t enough momentum to sustain the advance and prices have since fallen by over 500 points.
“Merchants have apparently been busy trying to reduce their US exposure by switching to other growths, since ‘optional origin’ sales increased by 607,700 running bales, with 546,900 bales involving commitments to China. … After this latest round of cancellations, or rather switches to ‘ optional origins,’ total outstanding commitments now amount to 6.5 million statistical bales of US cotton, plus 0.7 million bales in the ‘optional origin’ category.”
Going Up Again
On September 8: “NY futures have moved sharply higher, with December gaining no less than 1064 points during that period, closing today at 113.63 cents. … The market had closed the previous 12 sessions in a very narrow band of just 335 points, between 102.99 cents and 106.34 cents, with open interest showing hardly any change at all. But just when everyone was getting used to a dull sideways trend, the market found a way to escape the boredom. Although some point to the floods in Pakistan and the rains in India as the cause for this rally, we believe that it was a wide variety of factors, both fundamental and technical, that led to this bullish move.
“Enquiries are definitely picking up, as mills are in the process of replenishing their inventories. Yarn prices have started to rebound as well and we are seeing some encouraging signs on the retail front. … The fact that the Chinese Reserve is, as of September 8, actively procuring cotton in an effort to restock its depleted inventory, is another important element of support for the market. The first procurement auction for 24,300 tons failed to attract any sellers, which is to be seen as a bullish sign by the market. The buying program by the Reserve is intended to run through March 31, 2012, and should provide decent support underneath the market.”
The week before the opening of ITMA in Barcelona: “NY futures traded lower this week, with December dropping 201 points to close 111.62 cents. Although the market did not find enough follow-through buying to keep last week’s upside momentum going, it has so far managed to hold and consolidate recent gains. Volume tapered off considerably after 30,000 lots had changed hands last Thursday and even though overall open interest increased by 1813 contracts since then, December saw its open interest drop by 560 lots.
“However, conditions in the physical market have definitely improved in recent weeks, with yarn values continuing to trend higher and mills apparently being able to work with replacement values of around 120 cents landed Far East at the moment. Also, the floods in Pakistan’s Sindh province have probably washed away some 1.5 million bales and impacted the quality of the cotton that survived, while persistent rains in India’s Northern Zone has also adversely affected output and quality, which is lending support to the market.”
Now, a few weeks later: “The US currently has export commitments of 8.0 million statistical bales, of which only about 1.0 million bales have so far been exported. This means that there is still a lot of cotton to come out of the US, sold or unsold. US merchants are currently trying to figure out their quality position, because the US crop presents a very mixed bag of good, bad and ugly cotton against commitments of mostly premium grades.”
The next page of the cotton story is yet to be written. The Rupp Report will keep you up-to-date.
October 11, 2011