Sharon Johnson: Tight cotton stocks
The USDA reports contained friendly if not bullish surprises by tightening up the balance sheets for US and World cotton. US production was cut as expected pulling ending stocks down to 1.6 mln bales, its lowest level in recent history. World stocks were also cut and by 780K to 41.55 mln, its’ lowest since 1995 due a combination of cuts to production and increases to consumption. US cotton futures remained positive after the release but were unable to hold its gains and began a deep sell-off culminating in old crop months being down about 500 pts versus new crop which was slightly higher. As has been the case for the past few months, the market quickly turned away from trading the USDA numbers and focused on other factors which in this case was correcting this week’s 20-cent rally in the May contract. In addition, Friday was last trading day with May options requiring some “evening up” prior to the exercise of in-the-money calls and puts. Per open interest from Thurs, there were nearly 17K calls and 3500 puts in the money based on Fri’s close. Futures volume was heavy at 35,081 as sizeable rolling by index funds continue from May to July. Cert stocks rose to 214,152 with another 6,953 under review for a possible total of 221,105 bales. There are only 9 business days left prior to May’s first notice day of Apr 25.
2010/11 US Cotton Supply & Demand – As expected, the WAOB did embrace the final ginnings figure for US production of 18.1 mln statistical bales. To justify the drop, this agency reduced yields by 10 lbs to 811 lbs/ac but next month’s report from NASS will indicate if it is area, yields or both that fell. To the chagrin of bears, demand was not only left as is but domestic usage inched up 100K bales to 3.7 mln bales, an increase of 7% from the preceding crop year. Data from the first 7 months may support a year over year jump but record high cotton prices will mitigate that gain by the end of the crop year. There are other reasons behind the usage increase such as new cotton spinning equipment investment in the US that argue in favor of higher usage in the upcoming season and beyond (similar to India). However, when the last monthly consumption report is issued in August for the month of July, US mills are likely to have consumed less than the higher annual figure issued by Washington in their Apr report.
Exports were left at 15.75 mln bales and weekly and accumulative sales and shipping figures support as much. Despite impressive data as of the 35th week, which represents the two-thirds completion of the crop year, foreign mills are expressing increasing resistance to the 2.00+ cash prices of imported cotton especially in those countries who have access to cheaper domestic supplies. No where is this more evident than in China where mills and merchants are selling US cotton back to those same merchants from whom they purchased cotton. In that regards, the 3 mln bale cut to Chinese usage made by the USDA last November is proving to be warranted. The USDA reversed an earlier decision by reducing China’s cotton imports by 500K on this report, whether that reflects difficulty in obtaining cheaper Indian styles or refusing to take more expensive US cotton or both is unknown but those are likely.