NY futures continued to head south, as July dropped another 258 points to close at 87.78 cents, while December fell 189 points to close at 80.73 cents.
The marketΆs focus is squarely on West Texas at the moment, where anywhere from 2-5 inches of rain are expected across the main cotton areas between now and Tuesday. This rain event couldnΆt be timelier, since insurance deadlines are just a few weeks away, which means that instead of scores of abandoned acres we may actually see some green fields around Lubbock in a month from now.
Although it is difficult to put a number behind the potential impact of a soaking rain in West Texas, we would probably look at a US crop of 15.5 million bales or more instead of just 14.0-14.5 million bales without any significant rain.
However, while traders were mesmerized by weather forecasts, they seemed to disregard some other newsworthy items this week. What we are referring to are Chinese imports and US export sales, both of which looked rather supportive to us.
Just a couple of weeks ago the USDA had raised its estimate for Chinese imports in the current season from 12.0 to 12.75 million bales. However, based on the fact that China imported another 1.03 million bales in April, bringing the 9-month total to 10.95 million bales, we believe that the USDA number is still too conservative. With three months to go and with Australian cotton now getting added to the mix, we feel that Chinese imports will reach at least 13.5 to 13.75 million bales by the end of July.
What is interesting regarding the above is that the press continues to put a negative spin on Chinese import data, since they compare current numbers to the ones of previous seasons. Sure, China is importing less cotton than in the last two seasons, but thatΆs not relevant since the market is already aware of that. What the market hasnΆt factored in yet is that China is once again beating estimates by a rather wide margin. Just two months ago the USDA had Chinese imports still at 11.0 million bales and is now forced to play catch up with the actual numbers, which continue to surprise positively.
To put this into some perspective, while a 'million-bale rainΆ in West Texas may boost rest of the world (ROW) inventories in the coming season, China is reducing current ROW stocks by absorbing a million bales more than whatΆs in the latest set of USDA numbers. In other words, we may not end up with more ROW stocks next season after all.
The other positive surprise was todayΆs stellar US export sales report, which showed net new sales of 518Ά400 running bales, of which 360Ά000 bales were for nearby shipment (May/July). WhatΆs remarkable is that there were 18 markets pursuing US cotton, with China once again taking the lionΆs share at 269Ά300 running bales. For the current season we now have commitments at 10.6 million statistical bales, whereof 8.9 million have already been exported.
This report was nothing short of astonishing, because it came at a time when available US supplies were already below a million bales according to our calculations. The US started the season with total supply of 16.8 million statistical bales, of which 10.6 million have been committed for export so far and 3.6 million are going to be used up by domestic mills by the end of July. This leaves 2.6 million bales, from which we have to deduct 0.9 million bales for domestic mill use from August to October, and we further assume that around 1.0 million bales in export commitments for next marketing year (out of a total of 1.9 million bales) will be shipped from existing stocks. This would leave just 0.7 million bales available for sale.
In view of this small amount of uncommitted cotton we doubt that all of the current certified stock of around 430Ά000 is still available. Instead we believe that most of this certified cotton has already been sold and will eventually be applied for shipment, but in the meantime it serves its intended purpose as a deterrent, keeping spec longs at bay.
So where do we go from here? The slow moving upper level low, which is moving in from the west coast, is likely to produce copious amounts of rain and hail in West Texas over the Memorial Day weekend. Although this event is highly anticipated by the market and may therefore already be discounted to a large degree, we could still see some more downward pressure when traders return from the long weekend next Tuesday and see rainfall totals.
The chart still points to lower prices as well, although momentum indicators are in oversold territory and some caution is therefore warranted. WhatΆs needed in order to halt the decline is for buyers to emerge in support of the market and the most likely source of support is the cash market.
LetΆs not forget that physical supplies will remain extremely tight until at least November and with China being more active on the import front than anticipated, there should be plenty of support underneath the market. While July is hard to read as it heads into liquidation, we still believe that December near 80 cents represents great value when compared to C&F Far East prices near 90 cents.
Best regards
