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Quiet cotton market

Thursday Trading Activity – The
nearby lead month opened lower but hit its daily high within the first 90 mins
of trade only to find a low by 4:00 AM EDT that proved to be within 11 pts of
its 7 cent limit.  By the last hour
of trade, July had climbed above unchanged only to settle down 137 pts.  Follow-through selling from the
previous limit down close accounted for the general weakness as did the lack of
confidence on the part of buyers while specs continued exiting longs and/or
adding to shorts.  Similar to old
crop, the December made its highs by 10:00 PM EDT but then lost nearly 400 pts
over the next 6 hours.  By the last
hour, December tried but failed to take out its earlier highs but unlike July,
closed up 198 pts higher.  Estimated
futures volume per the exchange is 24,991, much better than the past few
days.  Cert stocks rose slightly to
206,112 with 56,663 under review for a possible total of 263K.  May open interest remains extremely
high at 5,358 contracts or 535,800 bales.   There are no deliveries this evening leaving the total
since last Thurs’ FND at 13 contracts. 

US Exports – This week’s
data is very similar to that of recent weeks with a negative 39K in sales as
cancellations by China and Morocco exceeded new sales made by Vietnam.  Shipments
totaled 361K bales of upland and pima cotton headed to China, Turkey, Vietnam,
Mexico, Indonesia, Brazil and Bangladesh.  Commitments after 38 weeks are
15.24 mln running bales nearly the same as the USDA estimate of 15.29 mln
running bales (15.75 mln statistical).  As for new crop, sales were a
modest 68K bales with Thailand and South Korea the two largest purchasers. 
With the start of the 2011/12 crop year just over 3 months away, combined sales
are an impressive 5.41 mln running bales or 37% of the USDA Outlook Projection
of 14.56 mln running bales (15.00 mln statistical).   

US Competiveness/World Trade
Prices – The weekly A indexes for old crop were down 32.52 cts with Cotlook to
182.85 and the USDA calculation off 32.49 cts at 180.07, the lowest for both
since Jan 20.  Cotlook made
substantial changes to the prices of various growths from countries within the
Afr Fr Zone as well as introducing the Brazilian quote, both of which led to a
historic one-week drop.  Brazil’s
low quote allowed it to command the nbr 1 spot with a weekly average of
171.66.  The succession of fighting
in the Ivory Coast led to its re-introduction at nbr 2 at 172.25.  Since Cotlook only allows two Afr Fr
Zone quotes within its top 5, either Mali or Burkina get to take over the 3
spot at 184.83, down nearly 36 cents. 
Despite the shuttling of growths and prices, MOT and Memphis held onto
nbrs 4 and 5 at their average values of 187.67 and 190.17, also down just over
25 cents.  The last two remaining
growths not in the A index are Australia and Uzbekistan at 191.25 and 203.67
respectively, a loss of 15.90 and 21.83 cts each.  The AWP took its largest one week fall dropping to 163.23
down 32.49 cts.  The 39 week
average of the Cotlook A index is 163.57.

New crop values fared much
better with the 2011 A index only down 1.63 cts to 148.32.  From cheapest to most expensive within
the A index are Benin 146.17 (-3.38), Ivory Coast 146.42 (-3.38), Mot and
Memphis 147.83 (-3.38) and Calif 153.33 (-7).  The two remaining non-Afr Fr Zone quotes are Brazil at
166.67 (-14.63) and Australia 144.00 (2.30), the latter is not allowed into the
A index although it is cheaper until Jan 1, 2012.           

CFTC On-Call – As was the
case with the March 2011 contract, there were nearly 8,400 contracts to be
priced by mills in the May contract in its last week prior to FND and all but
530 were completed by Fri, Apr 22. 
There were 2,629 EFPs and 7,060 EFSs that are largely responsible for
the 7,800 fixations.  There were
also 1,127 Julys fixed leaving 27,433 to be priced, rolled, cancelled, etc in 9
weeks, June 24, 2011. 


March US Mill Consumption – March
usage (Feb 27-Apr 02) by domestic mills was 333,589 running bales vs Feb’s (Jan
30-Feb 26) revised 280,308.  The 5-week
period for March averaged 66.7K bales per week vs the preceding month’s of 70K
or a decline of 4.7%.  NCC placed
the annualized rate for March at 3.68 mln bales, the lowest level since Sept
2010.  Feb’s annualized rate was
revised to 3.76 compared to the preliminary of 3.86 mln.  In the first 8 months, domestic mills
have consumed 2.425 mln bales vs the preceding crop year of 2.174.

US Weather – 
Weather in the
US, the 3rd largest cotton producing country, has taken center stage this month
with special emphasis occurring the past week.  Dryness in the Southwest and Texas in particular has
dominated discussions as only a few weeks remain for producers to plant in
dryland areas as well as those with drip irrigation only for getting cotton up
and running.  


The northern Delta
and northern Southeast regions have been plagued by a series of systems
sweeping across on a regular basis culminating in this week’s devastating
outbreak of tornadoes leaving death and destruction in their path.  Besides the delays to planting of all
major crops in Texas, Oklahoma Missouri, Arkansas, Tennessee, Louisiana,
Mississippi, Alabama, Georgia and South Carolina where the ground is too dry or
too wet, the Delta will very soon be dealing with flooding of the Mississippi
River.  The Corps of Engineers is pursuing
a plan to breach the Birds Point levee to easing rising water in Cairo,
Ill.  However, if the Corps is
successful, a large swatch of farmland in Southeast Missouri would be flooded
along with pollutants and sediment that would leave these acres less

Downstream, the
Mississippi River is approaching 50 if not 100 year flood records with it
cresting in Memphis on or near Tues, May 10.  As was the case last spring in Tn when heavy rains prevented
intended acres from being planted, cotton area in the northern Delta will fail
to meet producers’ intentions as the “clock runs out”.  There may be some corn acreage that is
switched to cotton for the same reason but it is unlikely to offset lost cotton
acres.  Returning to Texas, larger
planted area was anticipated as producers replaced drought-damaged wheat in
lieu of cotton.  That switching may
occur but planting rains are needed to prevent huge abandonment making
harvested area far more important than the actual planting figure.  The situation in the Delta should
become clearer by mid-May but Texas has until late May if not early June before
producers will begin calling their insurance agents.  The entire production scenario in the US has been thrown
into havoc with analysts including myself sharpening our respective pencils for
cuts to our domestic crop.         


The drop of 63 cents in the
Jul contract from its seasonal high illustrates not only the demand
rationing/destruction process in place but how over-extended the rally
was.  Had old crop only moved as
high as 150, mill business would have held up better and the inevitable pullback
would not have been as deep or as vicious as that seen in the past month.  Talk had been growing of the predicted
negative impact to mill demand since the turn of the calendar year and as
bearish as I was in that regards, even I am shocked at the extent of how
quickly demand went from a lot to some to near nothing.  Mills are now reeling from their panic
decision to pay far too much for cotton in the first quarter as retailers are
rejecting their goods and margins have plummeted.  On the other side of the balance sheet and side effect of
mills pulling away is the panic selling of cotton from producers, ginners,
merchants, etc.  They have lowered
their prices repeatedly but to no avail in many instances creating a vicious
cycle.  Some sources have suggested
until the spread between old crop and new crop prices narrow further, mills
will remain sidelined.  


At its’
widest, the 2010/11 A index was 90 cents over the 2011/12 and as of Thurs close
is about 32 cents over.  Since there
is not much interest at current, this difference may have to shrink by another
5, 10 possibly 15 cents before mills return to the table and therefore
stabilize if not allow some rally with old crop.  Whether the narrowing occurs by way of additional weakness
in old crop or higher values in new crop or some combination is unknown.  The July/Dec spread has lost ground as
well from a market top of 80 cents to the current 25 cents and any stability in
this spread should be watched for signs of such mill interest. 

Moving onto December, if not
for the 60+ cent drop in Jul cotton, I suspect the Dec would have traded to if
not above 1.50 instead of being sideways since Feb 18 when Jul hit its 210
high. Planting outside the US has gone reasonably well although dryness is an
issue in some countries and the outcome of India’s monsoons has yet to be
decided.  If the July does find
support, Dec can be expected to move higher if not much higher through the
upcoming month of May depending on the Wt Tx rain deficit situation.


An ongoing issue for the
July and one that could plague December are the higher energy prices hitting US
consumers in the form of higher gasoline prices.  Per this chart provided by EIA, as of April 24, gasoline on
a national scale is $3.87, 3 ½ cents higher from a week ago and 1.03 higher
from a year ago this week.  Looking
at other items bought by consumers that are considered necessities including
food, an AP article released this afternoon mentions several companies who have
already announced price increases include Kimberly-Clark Corp, Procter &
Gamble Corp, Unilever PLC, Colgate-Palmolive and PepsiCo Inc.  In addition, the nation’s larger
grocer, Kroger Co, “told analysts” earlier in the week that it saw 2% grocery
inflation in recent months and plans to keep passing through higher prices from
national suppliers to its shoppers”. 
Safeway Inc has also been successful in passing along higher prices.  Not the type of news the apparel and
home fashion industry want as consumers’ discretionary income is further
reduced which in turn will blunt their ability to buy clothing, towels, etc.

Just as the run-up was fast
and furious the drop has been even more so although at some point a bounce will
occur.  If the months of March and
Apr have shown us nothing else, it is the generational highs often spoken of are
in place.  How prices will trade as
the bridge from old crop to new crop is made is unknown but volatility will remain
high and breakouts may not warrant our trust.  Looking forward to May, the next USDA supply and demand
report will be issued May 11, which will include the first official look at new
crop.  Given weather concerns, the
WAOB has its hands full while also attempting to re-align their demand
projections with those of the real world.

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