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Cotton futures reflect opposing forces

The world is consuming cotton at an incredible pace, and the United States is benefiting through tremendous export sales. But the market just can’t get over the huge supply of available cotton.

At the end of March, U.S. export shipments of U.S. cotton reached a record 541,000 bales, a good chunk of which went to China. USDA’s April 10 supply and demand estimates promptly raised total U.S. exports for this marketing year by 200,000 bales, to 17 million bales. USDA also added another 100,000 bales to domestic consumption, pushing the total to 6 million bales.

According to the experts, China’s consumption of old crop cotton could rise by another 500,000 bales by the end of the marketing year, topping off at an eye-popping 46 million bales.

While the USDA report was construed as friendly, “the market all but fell on its face after it was released,” said economist O.A. Cleveland, in his weekly cotton update. “Again, instead of focusing on the growing demand, the market continued to focus on the estimated world carryover come Aug. 1, 2006, at 52.91 million bales.

“Historically, a carryover level that large has meant significant price erosion. Yet, as the year progresses, the market must pay heed to the fact that carryover at 53 million bales will be only 3 million to 4 million bales larger than Chinese demand during the coming season.”

To Allenberg Cotton Co. CEO Joe Nicosia, December cotton futures prices “reflect an equilibrium price that is trying to battle between two divergent forces. One is extremely large stocks currently available and large world ending stocks, which has had a tendency to keep prices down.

“You also have the very large Chinese demand, which tends to promote a longer-term bullish outlook.”

The market tries to solve the push and pull of supply and demand “by putting large carries in the marketplace, where the weakness in the front end reflects the large stocks that are available today and the higher prices in the deferred reflect the belief that over a period of time, Chinese demand will continue to grow and if we do have a crop problem somewhere in the world, prices will be able to rally.”

That said, Nicosia expects prices to trend higher in the short term “until the time when we see that the west Texas crop is out of danger, that they have enough soil moisture, and until we get some confirmation on the progress of crops in Pakistan, India and China.

“There is no doubt that the world has the capacity to grow enough cotton to take care of the demand that exists,” Nicosia said. “But if we run into any problems in those four major cotton-producing countries it could be enough to tip the balance to the bullish scale pretty quickly.”


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