While equities will become cheaper over time, a lower A-index may get the AWP down, but this in itself does not improve the competitive situation of US cotton.
Actually, what is needed to get US cotton into the marketplace is a rally in the futures market, which would allow merchants to lock in a wide enough spread between the AWP and the futures market.
Without that, most US new crop cotton will simply be placed into the government loan and stay there until such a 'flush out' rally creates a workable basis.
Looking at the latest US export sales report, we can clearly see how far behind sales are this season. As of September 28, total commitments stood at just 3.4 million statistical bales of Upland and Pima cotton, which compares to 6.8 mio bales a year ago.
Next week the market will have to deal with a USDA report that promises to be rather bearish. After Cotlook and the ICAC both revised their Chinese numbers recently, it seems to be a foregone conclusion that we will see similar changes in next Thursday's USDA report.
Look for a drop in Chinese consumption of some 3-4 million bales between this season and last, as well as an increase in the Chinese crop of at least a million bales. This could raise Chinese ending stocks to 15 or 16 million bales, although there may be some offsetting adjustments in the ominous "loss" column.
Other significant changes may include an increase in the crops of India and Pakistan of a combined 1.0 - 1.5 mio bales, while Australia's crop is likely going to be reduced by at least 0.5 mio bales.
The US crop should be more or less where it was last time, perhaps slightly higher due to the ideal harvest conditions in recent weeks.
marketing@alchempro.com
