The Rupp Report: Latest News From The Cotton Front

It was some two months ago that the Rupp Report last informed its readers about the latest news
from the cotton front. Quite a lot has happened with the downturn of the prices and the stocks. Now
it is time to give an update. As ever, the report is based mostly on the most appreciated
information from United Kingdom-based Plexus Cotton Ltd.

In mid-November, Plexus reported the New York December futures closed unchanged at 99.50
cents, while March dropped 240 points to 96.48 cents. “US export sales of Upland and Pima cotton
amounted to 646,800 running bales net, of which China took 630,200 running bales net. In addition
to that there were 528,000 bales sold to China under ‘optional origin.’ Total sales for the season
now amount to 9.5 million statistical bales and there are another 1.3 million statistical bales in
the ‘optional’ category.” As of the mid-November report, only 1.5 million bales had been exported,
and the backlog of outstanding commitments totaled some 8.0 million bales.

Record-high Crop

“According to the latest USDA figures, the rest of the world (excluding the US) will produce
a record crop of 107.6 million bales this season, surpassing the previous mark set in 2006/07 by no
less than 7.0 million bales,” the company continued. On the other hand, “mill demand in the rest of
the world is expected to remain stagnant at 110.5 million bales, due to slow economic growth and
man-made fiber substitution. As a result the seasonal production gap is expected to drop to just
2.8 million bales, which compares to much larger deficits of 13.3 million bales last season and
26.1 million bales two years ago.

Fierce Competition Outside The United States

“Considering that the rest of the world is nearly self-sufficient, the US has done extremely
well by filling its order books to the tune of 9.5 million bales, thanks to the fierce pace of
sales earlier in the year, when mills were still fearful that the world would run out of cotton. As
a result the US has entered this marketing year with a record 7.5 million bales in carry-in sales.
… This situation is likely to lead to fierce competition among non-US growths, as they try to
capture their fair share of this anemic market. Fortunately China has been acting as a stabilizing
force by aggressively procuring some of the excess supply, both in the domestic and international
markets, otherwise prices would already have come under a lot more pressure. The Chinese Reserve
has so far lifted 2.7 million statistical bales in the Chinese market and probably a similar amount
overseas. … As crops are moving in and unsold supplies keep building in non-US origins, we expect
to see some additional hedge selling by the trade.”

Lower prices

On December 1, the New York futures dropped considerably lower, with March down 518 points to
close at 91.30 cents from 96.48 cents two weeks earlier. This momentum in recent weeks became
strong enough to break through the Chinese level of support, taking prices to new 14-month lows,
Plexus considered, adding, “The move was all the more impressive since it happened in the face of
very strong US export sales, totaling more than 2.5 million statistical bales over a 3-week period.

Cancelled Contracts

“The US export sales report reflected a more routine course of business …, with
Upland and Pima sales increasing by just 84,100 running bales net for the current marketing year,
while another 19,000 bales were sold for 2012/13. Although net sales are still growing thanks to
China, it is troubling to see that another 35,900 running bales were cancelled in eight different
markets, led by Pakistan, Turkey and South Korea. The pace of shipments is also a negative, as just
163,400 running bales were exported last week, bringing the total for the season to 1.85 million
statistical bales so far, the slowest pace since 2000. The backlog of outstanding orders now
amounts to over 8.6 million statistical bales.

China As A Price Balance …

“Fortunately, there is the Chinese Reserve, who [took] a huge load off exporters’ and
domestic suppliers’ shoulders over the last six weeks and who is expected to continue to buy a lot
more in the months ahead. As of today the Chinese Reserve has procured over 5.0 million statistical
bales in the domestic market and probably at least 4.0 million bales in the international market.
By absorbing the world’s production surplus into its stocks, the Chinese Reserve is acting as a
counterforce to the extreme volatility in the cotton market since the summer of 2010.”

… While The Prices Collapsed

There is a big difference between the price swings in the Chinese and the international
market. As Plexus noted, “While the CC Index in China has dropped some 80 cents from its high of
215 cents earlier this year to its current price of 135 cents, the A-index has collapsed from a
high of 243.65 cents to a current quote of 98.15 cents, a swing of over 145 cents or nearly twice
as much as the CC Index. The futures market is not far behind the A-index, with a difference of
around 136 cents.”

One week later, on December 8, the company reported: “NY futures moved sideways in very dull
trading this week, as March added 75 points to close at 92.05 cents. … Through its domestic
auction program the Chinese Reserve has added another 1.1 million statistical bales to its
stockpile this week, which means that it has already accumulated around 6.1 million bales since the
middle of October, which equates to roughly 18 percent of China’s crop this season. The maximum
daily auction target is currently at 577,000 statistical bales and the fact that less cotton was
taken up this week, combined with an ever so slight rise in domestic prices, seems to indicate that
the support mechanism is working.

Struggling With High Price Contracts

“Against this backdrop of Chinese support, which has kept the CC-index at a relatively
elevated level of around 136 cents when compared to the current A-index of 98.70 cents, mills
around the globe have been getting some breathing room lately and are now in many cases able to
turn a profit against current replacement cost. However, a lot of mills are still struggling to
digest the many high price contracts they have engaged in earlier this year and it is going to take
a while until this overhang of expensive cotton has finally been worked through the system.”

So what’s next? Again, time will tell.

December 20, 2011