The Cotton Rally Goes On

By Jurg Rupp

During the past year, the Rupp Report has informed its readers several times about the development of the global cotton business and the soaring prices for the most important natural fiber - Cotton. The recent flooding in Australia will probably increase the already short supply of cotton. Based on reports from the Washington-based International Cotton Advisory Committee (ICAC) and United Kingdom-based cotton trader Plexus Cotton Ltd., here is a summary of the latest developments:

From Plexus comes this report dated January 6:

"NY futures had a mixed performance since our last report two weeks ago, as March traded down 690 points to close at 141.22 cents, while December rallied 517 points to close at 100.97 cents.

"After making an all-time high of 159.12 cents just before Christmas, the March contract fell for a few sessions thereafter but has since transitioned into a sideways pattern, closing the last 9 sessions in a relatively tight range between 140.43 and 145.76 cents. With the spot month calming down, the extreme backwardation has started to reverse as well, as the March/July inversion retreated from over 3300 points to currently around 1300 points, while the March/December inversion went from over 6200 points to a little more than 4000 points today. In fact, while March has been going through a steep correction, December closed today at a new contract high of 100.97 cents."

Lack Of Available Supplies
The Plexus report continues:

"Bearish commentators have been pointing out that export business has slowed considerably in recent weeks. While this is definitely the case, the bullish camp is quick to counter that this is mainly due to a lack of available supplies and that sellers are in no hurry to discount prices on their remaining inventory.

"We believe that both sides raise valid points and that's probably why the market has been relatively steady over the past two weeks. While most consuming markets are currently well supplied with cotton, as they are able to draw from their own crops as well as imports, it doesn't change the fact that from a statistical point of view the business is in one of the tightest seasons ever and that many origins have already committed the bulk of their crops."

From ICAC comes the following report:

"The USA is the largest exporter of cotton, accounting for an estimated 41 percent of world exports in 2010/11. In 2010/11, exports by India, the world's second largest exporter, were capped by the government below 1 million tons, all of which have been committed. Central Asian commitments are estimated at over 1 million tons, or 85 percent of projected exports. Australia and Brazil are expanding production substantially, responding to record prices, but this cotton will not become physically available until April 2011. It is estimated that only about 10 percent of projected world trade of 8.3 million tons is still available for purchase at this relatively early stage of the season. The scarce uncommitted supply may provide strong pressure on prices and cause increased volatility through the rest of the season."

And, as Plexus reports:

"At the end of December, US export commitments for the current marketing year amounted to 14.5 million statistical bales, which combined with the 3.6 million bales that US domestic mills require adds up to 18.1 million bales. In other words, the 2010/11 US crop  currently estimated at 18.27 million bales by the [U.S. Department of Agriculture]  has basically been committed! This means that statistically speaking, any additional sales will have to come out of the relatively small beginning stock of 2.95 million bales. Since there are already 2.0 million bales committed for next marketing year (beginning on August 1) and domestic mills will need around 1.0 million bales between August and October to tie them over to new crop, the US is for all practical purposes sold out."

No Price Concessions
Plexus continues:

"Although mill buying is currently very irregular and selective, offers nonetheless remain at elevated levels and there have been no noticeable price concessions on recent sales. The A-index was still at over 173 cents this morning [January 6], while the China Cotton Index converted to 188 cents. Until about six months ago, the A-index traded at a 5 to 8 cents premium over spot futures, while it is currently at a 30 cents premium, reflecting the tight situation in the physical market.

"When we look at the latest net positions of the various market participants as reported by the [Commodity Futures Trading Commission], we have Index Funds (5.84 million bales net long) and Spec/Hedge Funds (5.22 million bales net long) versus the trade with 11.06 million bales net short. Most of these trade shorts are against pending on-call fixations, since there is not really that much cotton left that needs to be hedged, at least not in current crop. Today's on-call report shows that as of December 31 there were still 10.45 million bales in unfixed on-call sales, of which 2.7 million are on March, 1.9 million on May and 3.7 million on July." Plexus sees this as a problem, noting that "there may be a lack of sellers to accommodate the 8.3 million bales of fixations that still need to be done over the next five months."

Cotton Supply Almost Sold Out
As ICAC reports:

"Relatively low world stocks of cotton; limited supply, robust demand and a very low level of uncommitted cotton caused the surge in prices in 2010/11. The Cotlook A Index surged from 86 cents per pound on August 2, 2010 to a record 186 cents per pound on December 22, 2010. The Cotlook A Index retreated to 172 cents per pound on December 31, 2010. The season average Cotlook A Index reached 129 cents per pound, 66 percent higher than the 2009/10 average of 77.5 cents per pound. Similar trends were recorded at the [IntercontinentalExchange] in New York trading the cotton futures contract."

What's Next?
It will be very interesting to see how the international retailers will react to this situation and how they source their cotton apparel for the near future. Probably we'll be in a situation in which apparel will be more appreciated as having some value instead of being a cheap commodity.