NY futures came under renewed pressure this week, as July dropped 290 points to close at 89.21 cents, while December lost 255 points to close at 86.52 cents.

NY futures sold off earlier this week after India announced that it would lift its export ban, which has been in force since the beginning of March. Although IndiaΆs latest edict has apparently no quantitative limitations, there is still considerable doubt as to how many bales the government will ultimately allow to be shipped, especially when considering that the latest estimate by the CAB has ending stocks at just 2.5 million local bales.

Domestic prices in India actually rose after the announcement, but the drop in NY futures was probably the result of longs exiting positions, since a potential short squeeze in the July contract is now less likely due to the promise of additional supplies in the system.

While India may bring more cotton to the world market, China seems to be ready to receive it. It is strongly rumoured that a fresh 1 million mt “general” quota has just been issued of which at least half a million is now being distributed to mills. At this juncture, it does not seem to be tied to buying of Reserve stocks as had been rumoured, but no official announcement has yet been published. If it proves to be true, it will still remain unclear how much of this quota will be used to clear existing consignments lying in China, existing commitments yet to be shipped and how much will actually be used for new business.

The latest US export sales report showed no evidence of additional buying by China just yet. For the week ending on April 26, net sales for the current marketing year were down by 14Ά200 running bales, while commitments for next season rose by 79Ά200 running bales. Cancellations by China as well as eight other markets totaling 95Ά200 running bales raised renewed questions as to how many of the 3.5 million bales in unshipped commitments should be considered as dubious. Counteracting these fears were strong shipments of 336Ά400 running bales to no less than 25 different markets, which is a clear sign that mills around the globe still want and need US cotton.

Notwithstanding the unpredictable actions by China and India, which cause some erratic moves in the market, it doesnΆt change the fact that there is currently too much cotton in the world, after we have witnessed one the most dramatic statistical swings over the last two years that has taken us from a 16.4 million bales shortfall in the 2009/10-season to a 15.4 million bales surplus in 2011/12. Had it not been for the aggressive buying by the Chinese Reserve, which removed an estimated 18 million bales from the marketplace this season, there is no telling how low prices might have fallen over the last eight months.

In a week from now, on May 10, the USDA will issue its first projection for 2012/13. Analysts seem to agree that there will be a substantial reduction in global output from the 123.1 million bales that were produced this season and we should also see a recovery in mill use from the current 107.7 million bales, which is the lowest number since 2003/04. Most agree that there is still going to be a production surplus in the coming season, but the big question is of course whether it will be 3, 7 or 11 million bales?

There is little doubt that global acreage will decline by some 5-10%, as farmers in China, India, the US and many other places are switching some of their acres to food crops. However, while China and India will likely see smaller crops as a result of this acreage drop, the same is not true for the US. Despite planting possibly as few as 12.5-12.7 million acres (vs. 13.2 million planting intentions on March 30), better climatic conditions are likely going to lead to lower abandonment as well as higher yields. This is especially true in the case of Texas, which experienced a disastrous growing season last year. It is therefore quite conceivable that the US could end up with a crop of 18.0 million bales or more, which compares to a 15.6 million bales crop in the current season.

If origins outside the US were to produce 8% or 8.6 million bales less next season and if the US saw an increase of 2.5 million bales, global output would amount to around 117 million bales. Even if demand were to recover to around 111 million bales, we would still end up with a seasonal surplus of around 6 million bales. Under such a scenario it would be difficult to imagine firmer prices in the coming season, especially since the US has sold just 1.0 million bales for shipment August onwards so far. In other words, there is a lot of cotton that has yet to be marketed and with mills buying only for nearby shipment, producers should feel the pressure this fall.

So where do we go from here? With India bringing some additional cotton to the market and with US export sales not making any headway at the moment, a potential short squeeze in the July is becoming less likely. This could still change if China were to use new quotas to mop up existing supplies over the next couple of months. However, with July currently trading nearly 300 points above December, we could also run into a situation in which current crop stocks get dumped as we make the transition from July to December, because it doesnΆt make much sense to hold on to unsold stocks in an inverted market, especially if the outlook for new crop prices is bearish. July feels unpredictable to us at the moment, as there are a variety of factors that could either pump it or dump it and we therefore prefer to focus on December, where we still subscribe to a slightly bearish view until proven otherwise.

Best Regards