Old- and new-crop cotton prices have converged. At its widest, the July/December spread reached an unprecedented 90¢ per pound, but has recently traded as low as 14.5¢ per pound.
Global output in the 2010-11 marketing year jumped by 13% over the previous year. Spot prices skyrocketed to record heights regardless, because seemingly insatiable
Asian demand sopped up all exportable surpluses, leaving exporting nations with very low inventories. New-crop prices remained depressed, because it was assumed that high prices would ensure that farmers in all producing nations would ramp up production once again in 2011-12 to alleviate the tightness. A lethal combination of users scrambling for supplies and selling pressure on new-crop contract months was strong enough to form the truly classic backwardation we witnessed.
By early March, however, importing nations began to cancel some old-crop commitments, and spot prices plunged. The cancellations made for bearish headlines, but the actual number of cancellations was not that significant. Net old-crop cancellations for US exports from March 10 to date totaled 212,000 bales, which is merely a slow week’s sales. To account for the cancellations, the June 10 USDA crop report lowered its projection for 2010-11 shipments, from 15.50 million bales in May, to 15 million bales. With nine weeks left to the marketing year, US shipments will have to average about 250,000 bales per week to meet the target, which is not an insurmountable obstacle.
At 5.3 million bales, new crop sales are still well above average for this time of year. Last year at this time, new-crop sales were only 1.6 million bales. But since mid-April, new-crop sales have slowed to a seasonal pace. As a result, the USDA revised 2011-12 exports downwards as well, from 13.5 million bales, to 13 million bales.
New-crop prices have not fallen apart, though, because US weather conditions are turning into a real disaster. The 1.5 million additional acres planted for the 2011-12 crop are all for naught. In the June crop report, the USDA lowered the harvested-to-planted ratio to 81.1%, down from the 86% May estimate. This compares with a 2010-11 ratio of 97.5%! The estimate for the 2011-12 crop now stands at 17 million bales, more than 1 million bales below last year’s crop.
On June 13 the USDA released its first crop condition report for cotton. The good-to-excellent portion of the crop was a scant 28%. That is dramatically worse than last year at this time when the top portion of the crop comprised 62% of the total. All principal growing regions in the US – Texas, the Mississippi Delta, the Southeast, and California – remain dry and in need of rain.
Global ending stocks for 2011-12 are forecast to rise to 40% of consumption, up from 36.5% in 2010-11. China, India, and Pakistan are all expected to have much larger crops, which means that at the moment we are not looking at slipping back into a tight spot market.
In the immediate future December cotton will be priced off the fortunes of the US crop. The USDA slashed its estimate for 2011-12 US exports because of expectations that larger crops in other producer/exporter nations will compensate for what looks to be a dismal US crop.Chinese acreage expanded by 6.5% over 2010-11. Weather has not been perfect, but good enough to anticipate that the USDA’s 33-million-bale estimate – up from 30.5 million bales last year – could be achieved. Another bearish factor, which has been difficult to quantify, but from anecdotal evidence and simple logic seems to be credible, is that synthetics have made inroads because of the prohibitive price of using cotton in lower-priced, mass produced clothing.
Protect long positions in December cotton. Raise stops on December cotton, which we recommended on April 15, from $1.10 per pound, to the recent lows of $1.28 per pound, close only.
