NY futures gave up additional ground this week, as July fell 225 points to close at 83.23 cents, while December dropped 180 points to close at 83.28 cents.

Spec liquidation and a lack of trade buying continued to depress values this week, with July settling right at an important 5-month uptrend line today. According to the latest CFTC report, which contains futures and options positions, speculators large and small liquidated about 3.6 million bales in the four weeks between March 19 and April 16, and the exodus carried on this week. Spec liquidation in cotton seems to be related to weakness in other commodities, such as the Ag sector or precious metals, as the exuberant mood that prevailed among many fund managers until recently has given way to a much more cautious approach.

However, while the technical pictures looks disconcerting at the moment, todayΆs excellent US export sales report reminded traders that the market may not be quite as gloomy as it currently feels. Net new sales for the current marketing year (April to July shipment) amounted to 245Ά000 running bales of Upland and Pima cotton, with another 32Ά900 running bales sold for shipment August onwards. Exports were stellar as well, as no less than 350Ά700 running bales were shipped last week! Total commitments for the current season now amount to 12.7 million statistical bales, whereof 9.6 million have already been exported.

The fact that China bought 203Ά600 running bales of US Upland and Pima cotton and received 178Ά800 running bales in shipments last week should be seen as supportive by the market. China continues to absorb cotton and yarn from the rest of the world at a torrid pace and we donΆt think that the market fully appreciates the magnitude of these imports. Over the last 20 months China has imported just under 40 million bales of raw cotton, or an average of about 2 million bales a month! In addition to that, China has taken in an ever-increasing amount of yarn, with the just released March figures showing that a record 172Ά000 tons were imported last month alone. For the first quarter of 2013, Chinese yarn imports of 443Ά000 tons are running around 51 percent ahead of last year, with India and Pakistan supplying the bulk of it.

We estimate that the US has currently only about 2.8 million bales (including the certified stock) left for sale, assuming that shippers are reserving around 1.8 million bales out of existing stocks to supply domestic and foreign mills between August and October. Therefore, if the US were to sell 150Ά000 bales a week, it would take about 4 months to completely sell out and at 200Ά000 bales a week stocks would be gone by the end of July! Typically, when inventories are running that low, prices tend to rise in order to ration demand, but we are currently seeing the exact opposite, with a falling futures market enticing mills to buy more. US styles are once again among the cheapest offers available and there is not really that much competition anymore at that price level, apart from various African origins and perhaps some additional Indian offers. Beyond that there is still Australia with a decent chunk of cotton, as well as Central Asia, although both of these growths are quite a bit more expensive than US cotton. In other words, the US has maneuvered itself into a very competitive position and we should therefore see continued strong offtake in the weeks ahead.

Since US inventories may be all but gone by the time new crop arrives, the market is paying close attention to what is happening with new crop plantings! Over half of the US cotton acreage is situated in Texas, which has been exceptionally dry so far this year. There is still ample time for moisture to arrive, but with every week that goes by without rain, the market is going to get a little more nervous.

So where do we go from here? The market closed today at a pivotal point! If the uptrend line that dates back to early November is broken, we will likely see another round or two of spec and technical selling, which could lead to a washout and force July down an additional 3-5 cents. However, if that were to happen, trade buying would likely intensify dramatically and eventually lead to a sharp rebound. As we have stated above, the US needs to start rationing demand, not stimulate it even more. If the market were able to hold support in the days ahead, it would probably lead to a slow bottoming process and then a gradual climb higher as the many trade shorts in the July contract get covered. In any case, barring any unforeseen event on the macro front, we believe that the futures market is cheap enough at current levels and that prices will recover over the coming weeks. The weather in Texas will play a major role in the market over the next 5-6 weeks! If it rains, it will likely put a cap on prices in the mid-80s, but if the drought continues, it could set the market on fire!

Best Regards