NY cotton March futures confined to extremely narrow range

Since late last week the Chinese Reserve has been acting as both a buyer and a seller in the domestic market, procuring cotton from producers at 20’400 Yuan/ton while at the same time offering stocks to mills at 18’000 Yuan/ton. On the procurement side the Reserve has bought nearly 3.4 million tons (15.5 million bales) so far, only slightly less than at the same time a year ago, and in a few weeks from now the government will be in control of nearly all remaining supplies in China.

Sales auctions have been small by comparison, as less than 72’000 tons (328’000 bales) have so far been taken up by mills. Only about half of the auctioned quantity has been procured by mills, as they seem to be in no hurry to bid for Reserve cotton from the 2011/12-season and instead continue to focus on imports, which in the case of Indian cotton are still available at or below the Reserve price equivalent. Apparently there was a sizeable amount of Indian cotton sold to China last week.

So where do we go from here? Sooner or later the market will make an attempt to break out of this straitjacket and the odds seem to favor a move to the upside. The downside seems to be fairly well contained as neither speculators nor the trade have an incentive to add to their net short position in New York considering a) how much US cotton has already been committed, b) that the certified stock is disappearing and cannot easily be replaced at current prices and c) Chinese buyers are ready to buy volume on dips.

Plexus