Even though the US managed to sell nearly 1.4 mio bales over the last two weeks, which clearly proves its competitiveness, the futures market has so far been unable to find a decent bid and continues to slide from one contract low to another.
Speculators keep selling the market aggressively based on an ugly looking chart, while the trade may have been selling futures in anticipation of the impending AWP blending, which will likely force a considerable amount of cotton out of the loan.
This morning, Cotlook added three additional forward quotes to the new crop A-index, bringing the total to five, which means that theoretically we could see the start of the blending process as early as next. These five forward quotes averaged 62.75 cents today or 455 points more than the current A-index of 58.20 cents.
If this spread were to be maintained during the blending period, it would force the AWP up by that margin in a matter of six weeks. This would surely force merchants to redeem cotton almost immediately and hence we have seen increased trade selling in the December and March lately. So we do at the moment have a situation where there are plenty of reasons to sell futures, with the only buying interest coming from mills, be it in the form of new purchases or fixations.
For the week ending April 19, US export sales totaled a respectable 587’900 running bales, including both Upland and Pima sales for this and next marketing year. Like the week before, these sales were spread among 25 different markets and China was responsible for about a third of the turnover. For the season, total sales have now reached 11.8 mio statistical bales and a total of 7.1 mio bales so far been shipped.
Weekly shipments finally started to pick up as they amounted to a marketing year high of 362’900 running bales, which is still a bit shy of the average needed to make the USDA forecast of 13.5 mio bales, but we are getting closer. The fact that nearly all of the sales were for nearby shipments leads us to believe that the pace of exports will accelerate considerably in the weeks and months ahead.
At the same time, commitments for shipment August onward are still at only 450’900 running bales of Upland and 100’200 bales of Pima. That’s a promising sign for the bulls, because it means that mills still have heaps of cotton to cover between August and October.
Interesting to note in this regard is that some mills we talk to have recently expressed their interest in extending coverage six to nine months out, but they are unwilling to pay the price premium such forward quotes command. So they decide to stick with their hand-to-mouth policy for now, in the hope that forward prices will continue to migrate down to the 50 cents level as they have done for the last three years.
Since March 2005, the last 11 futures contracts have gone off the board somewhere between 47.50 and 54.34 cents and May 2007 follows in the same footsteps. The market believes that unless we see a much tighter balance sheet, which may be brought about by a crop problem and/or by stronger than expected import demand from China, prices will remain stuck in this all too familiar pattern.
However, while this is certainly the most widely accepted analysis, we should not lose sight of the fact that a) the global balance sheet is tightening, albeit slightly, for a third season in a row and b) that we are dealing with unprecedented events in the financial sphere, from which the cotton market will not be able to detach itself indefinitely.
This week, the US stock market made new all-time highs, while the dollar is approaching all-time lows against most major currencies.
Set in motion by a much too accommodative monetary policy by central banks, global supply of money has reached proportions never seen before, which is now translating into accelerated inflation of all sorts of asset prices. The latest money supply growth figures speak for themselves: US up 11 %, Euro zone up 10%, UK up 13%, India up 20.3%, China up 17.2%, Australia up 12.7%, South Korea up 11.3% and even Japan is up 6%.
This proverbial tide of liquidity is lifting all the boats, and cotton will be no exception. As input costs, such as energy, fertilizers, interest rates and recently even salaries continue to go up, while the US currency goes down, cotton cannot hold against this inflationary trend indefinitely, even if we continue to see yield improvements in the years ahead.
