High on stocks, cotton cos adopt wait-n-see attitude
30 Nov '07
4 min read
With current and new crop values pulling in different directions, carry between the various months has stretched to unprecedented levels. On First Notice Day, the spread between the two Decembers measured as much as 1432 points, or 119 points per month.
With December now history, March seems to follow in its footsteps, as the March/Dec'08 spread is widening as well and currently amounts to 771 points or 86 points a month.
Bulls continue to pin their hopes on December 08's ability to anchor current crop and so far this seems to be working, although some fear that December could come under pressure as well if the demand picture worsens, which is certainly a possibility. However, there are other factors that work in December's support, such as the price of competing crops and the above mentioned threat of accelerating inflation.
Forward prices of corn ($ 4.30), soybeans ($ 10.20) and wheat ($ 7.60) are all near record levels and continue to pose a very real threat to any cotton acreage that can be dedicated to something else.
Meanwhile inflation, particularly in energy related products, combined with a weakening dollar, is beginning to squeeze growers as their input cost is rising while revenue is declining. Bumper crops and rising yields have shielded growers to some degree against these negative effects in recent years, but there is a limit to that.
Also, cash business is picking up at these levels and the last two US export sales reports showed a combined total of around 500'000 running bales, which is encouraging and brings the season total to 7.4 mio bales, around 2 mio bales ahead of last season's pace. The fact that mills are poorly covered and that there are still 6.2 mio bales of on-call sales to be fixed should provide decent support from here on down.
We therefore feel that the March contract should hold somewhere around 63/64 cents. At the same time, there is little reason to believe that the market will rally anytime soon. There is simply too much cotton to chew through at the moment and mills are in no hurry to pay higher prices. We therefore expect the market to stay in a relatively tight range in the foreseeable future.
marketing@alchempro.com
