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March cotton

US EXPORTS

2010/11 Weekly sales totaled
198K bales with the largest buyers in descending order Bangladesh, Turkey,
China, Indonesia, Mexico and Pakistan. 
As of Dec 9, commitments had risen to 13.56 mln running bales or 89% of
the USDA projection.   If weekly sales average 250K over the
next 6 weeks, by the mid-point of the season (26th week occurs on Jan 28) the
remaining 1.73 mln running bales of available US cotton will have been
sold.  Shipments totaled 325K bales
with China the largest recipient followed by Turkey, Thailand and
Indonesia.   After 20 weeks, 3.35 mln running bales
have been shipped or 22% of the official target.  To reach the USDA goal, weekly shipments must average 373K
over the next 32 weeks vs the 168K average shipped per week thus far despite
the early harvest and readily available cotton in the pipeline.  New crop sales of 60K bales were made
to Turkey, Thailand, Mexico and Japan for a year to date total of 1.48 mln
bales.

DISCUSSION

There is a heated discussion
occurring within the US regarding the impact of continuing export sales.  This week’s smaller sales likely
reflect the increased price level through last Thurs, Dec 9 suggesting next
week’s sales should be at best the same and at worst much lower.  Cotton’s global high price is blunting
demand for cotton, we know as much from the USDA Supply & Demand Reports
from November and this month with more to follow January forward.  That does not mean cotton demand has or
is being eliminated although some Asian mills had closed the past two months
due to lack of cotton or their inability to pay for it.  We also know demand has increased for
polyester and other synthetic fibers given their price run-up although
measuring the increased use on any given day is all but impossible.

The argument is not whether
all fiber demand is holding up but how much cotton usage is being hurt?  For instance, earlier this week Chinese
yarn production data was released and at first blush, it was a strong
figure.  But here is the rub, that
figure of 2.467 mln tones which was the second highest on record was for all
fibers including cotton.  Chinese
mills have orders to fill and they are using various fibers to fulfill those
orders.  Retailers have little
choice but to accept the change in fiber content as well as a price increase
since they are fully aware of the record increase in cotton’s price, lack of
availability and in some instances poor quality.   Making the distinction that all fiber yarn production
is strong but does not necessarily reflect high cotton content may seem like a
minor distinction but goes to the heart of cotton vs all fiber demand not only
in China but on a global scale.

US COMPETITIVENESS

The A indexes were up nearly
10 cents due in large part to the US futures rally.  The Cotlook A 5-day average is 169.11 and the USDA
calculation is 166.97 vs the preceding 159.36 and 156.45 respectively.  The two US quotes, MOT and Memphis,
have stayed at or near the nbr 1 and 2 spots the past week.  MOT rose to 166.20, a gain of 975 pts
with Memphis at 67.25, up the same amount.  The two cheapest Afr Fr Zone quotes were up exactly 10 cents
with Mali and Benin averaging 171.00 and 171.25.  The cheapest quote outside the A index is Australia at
164.75 which is not allowed in the A index per Cotlook rules and the most
expensive is Uzbekistan at 193.90.

The AWP is up 928 pts to 150.13.  Note:  The daily
Cotlook A index hit a new all-time high on Wed, Dec 15 at 173.30.  The Cotlook A index has averaged 124.37
since Aug 1, 2010.

PRICE IMPACT/CONCLUSIONS

US cotton futures are very
close to its Nov highs unlike those of China, Pakistan, India, etc which have
not followed through to the same extent.  Cash price by way of the Cotlook A index are at or near new
highs but it more influenced by US futures than any prices in any other country
with the possible exception of China. 
The US rally is an attempt to ensure US carryout is not as low as the
WAOB figure of 1.9 mln from the Dec 10 Supply & Demand report.  Over the next few weeks, sales will
reach if not slightly exceed the USDA projection of 15.75 mln statistical
(15.29 mln running bales) but the real key is the final number of shipments as
the impact of cotton’s high price is finally felt.  Domestic usage in the second half of the year will show a
modest reduction due to the very high price of cotton so final carryout should
be 2.1-2.2 mln.

As to the longer term trend
of US cotton futures, it comes down to the following:  do futures need to move higher or even to new highs due to
increased export sales over the next few months or was the push to highs last
month sufficient to price in US stocks in the 2.0 mln area while global
carry-out over time reflects additional demand rationing? My suspicion is the
second but that is part of the long running battle between those focused on the
cash side and those following futures.

On a miscellaneous note, trading
up or down on any given day based on activity in US$ is great for day traders
but means little to cotton fundamentals as export/import business is not driven
by a one-day change but the overall trend over time.  I find it somewhat laughable that there are fundamental reasons
attributed to the market’s movements on a daily basis when in it fact, traders are
simply initiating positions because of the US$ movement and its impact on other
commodities.

The March closed at a new
high for the week but did so from light volume and was unable to close at limit
up.  Any pools during the day were
small and options never traded much above limit up begging the question is
there something else driving March? 
As for tomorrow, my technician says “This is a dangerous day for March
Cotton.  Seven up daily timing
calls for a lower close so there is risk of a reversal top.”  Again, longs are urged to take
preventive measures to protect profits while shorts may get some relief that
may last longer than the occasionally day down of late.

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