In other words, the price which mills and the futures market are currently willing to pay is too low compared to the AWP. One may, of course, conclude that all that needs to happen is for the AWP to drop by several cents and everything will work out. But what will put pressure on the AWP (A-index) if US cotton is not competitive?
That's why the Step-2 was so important for the competitiveness of US cotton. It was designed to bridge the gap between US and foreign growths by granting an instant rebate of several cents to exporters. This, in turn, forced foreign competitors to react by lowering their prices in order to compete, which led to a lower AWP and so on. The Step-2 allowed US cotton to stay competitive at all times.
However, without the Step-2 next season, there is basically no pressure on foreign growths. Unless US growers are willing to lower their equity demands, which is unlikely at the beginning of the season, US cotton may not be competitive for quite a while. This will allow foreign growths to capture market share early on, which should keep the A-Index and hence the AWP well supported, making it very difficult for US cotton to enter the game.
This would only change if a bearish supply/demand outlook would prompt merchants to enter into short positions in anticipation of falling prices. But in a more or less balanced world supply/demand situation, US cotton seems to have no other choice but to assume the role of residual supplier and to wait for its turn.
We therefore expect the market to remain in a sideways pattern in the foreseeable future. Since the market is hovering just above its contract lows, we would not rule out a quick washout to the downside if sell stops below 52.95 get triggered. However, based on our above comments, we see no reason for the market to fall apart anytime soon or to run away to the upside.
marketing@alchempro.com
