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 over the past couple of weeks. Resistance above the 2-dollar mark has been increasing, but since there are still 5.0 million bales in mill fixations to be done in less than three months the market continues to enjoy decent support underneath.
The bulls received a big boost today from a surprisingly strong US export sales report. 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. Shipments continued at a decent pace as well at 415’200 running bales. For the season total commitments now amount to 16.0 million statistical bales, of which 9.0 million have so far been exported. For next season total sales amount to 4.7 million statistical bales so far, which compares to just 0.55 million bales a year ago.
On March 31st the USDA will officially launch the new crop guessing game with its ‘planting intentions report’. The consensus foresees a number in the 13.0 – 13.5 million acres range, which would be some 20% more than the 11.0 million acres that were planted this season. However, we all know that more plantings do not necessarily equate to a proportional increase in output, especially in a “La Nina” season. West Texas, which accounts for a high percentage of the US crop, remains a lot drier than normal and the 3-month outlook does not look promising in that regard. Abandonment will therefore almost certainly be higher than this season and we believe that it would be premature to count on a crop of more than 20.5 to 21.0 million bales at this point.
The USDA won’t publish any estimates on global supply/demand for next season until its May report, but 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 by a wide margin. However, a lot will have to go right for production to jump by some 13-17 percent over the current season. But let’s assume for argument’s sake that the world will indeed be able to produce such a big crop. Does that mean that prices will fall back to 85 cents as some are predicting? We believe that there are a number of compelling factors speaking against it!
First of all, 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. Let’s not forget that in 2006/07 mills were already using 123.8 million bales and we can probably all agree that global retail demand has grown substantially over the last 5 years. In our opinion it would be a mistake to use the current number of 116.6 million bales as a benchmark from which to project future demand. The reason mill use is currently at “only” 116.6 million bales is not because demand is weaker than in 2006/07, but because there isn’t more cotton available!
In other words, we believe that there is a lot of latent demand that would immediately surface if more supply were available. As we have previously stated, if global per capita demand for cotton was as high as US per capita demand, total global consumption would amount to roughly 470 million bales or about four times the current level. This illustrates the enormous growth potential on the demand side and traders need to get away from their ‘years of plenty’ mindset, which ceased to exist once the other half of the world’s consumers, led by China and India, started to come into the picture several years ago.
We believe that we are now in a perpetual state of resource scarcity, in which the world is struggling to meet increased demand for food, energy, clothing and just about any other wants and needs this growing army of consumers may have. Demand will have to be throttled down, but that can only happen via higher prices.
Another reason to be optimistic about the “nominal” price of cotton is that its denominator, the US dollar, is likely to weaken further over the coming years. The US is currently running a budget deficit of around 1’700 billion dollars a year and a current account deficit of nearly 500 billion dollars annually, which have become impossible to finance without the Fed monetizing a huge part of this new debt by printing money out of thin air. Since the Euro and Yen are facing similar problems, the debasement of the US dollar may not be felt as much in the cross rates with other major currencies, but will instead manifest itself in higher gold, crude oil and commodity prices.
So where do we go from here? Mills have once again missed an excellent opportunity to reduce their on-call exposure during last week’s price break. With US export sales still running strong and de-certifications starting to show up, the May and July contracts have maintained their explosive upside potential and new highs are therefore not out of the question yet.
For reasons mentioned above we do like December at its current level, because we feel that it will act more like a current crop month with supply issues rather than a new crop month with plenty of availability. Although a record crop may be on its way, there will be so much pent-up demand from mills trying to stretch their requirements into new crop that it will be logistically impossible to oblige everyone in a timely manner before early 2012. Once mills realize this predicament, they will likely scramble for coverage similar to what we have seen this season, which could bid up the December contract quite substantially.
Best Regards
