What is in this article?:
- Anatomy of dollar cotton โ what has changed?
- Bullish factors abound
- USDA projects another seasonal deficit of around 4.1 million bales.
- If global per capita consumption of cotton was to rise to the level of U.S. per capita consumption, annual cotton demand would be around 460 million bales.
- Daily demand for crude oil will bump against the world’s ability to produce it, which means that energy prices are going to rise further. This will have a bullish impact on cotton prices.
Dollar cotton in 2010 is riding the convergence of several bullish factors including a massive world production deficit in old crop cotton, the declining value of the dollar, strong technical signals and growing demand, according to Peter Egli, risk manager, Plexus Cotton, speaking at the Ag Market Network’s Oct. 12 teleconference.
Egli noted that over the last few years annual world cotton production deficits of between 2 million and 3.7 million bales have slowly but surely been whittling down burdensome world stocks. In 2009-10, however, the production deficit blew up to 16.4 million bales due to production shortfalls in major cotton-producing countries.
The deficit “is by far the biggest on record,” Egli said. “The jury is still out in regard to the current season. But at the moment, USDA projects another seasonal deficit of around 4.1 million bales.”
The behavior of the Chinese government only adds to the bullish theme, according to Egli. “There has been a massive effort to auction off reserve stocks to keep local markets supplied with cotton. Since May 2009, the Chinese government has auctioned off about 15.2 million bales of its reserve, a figure which does not include a recent allocation of about 1.3 million bales.”
So far, USDA statistics have not completely reflected this significant drawdown, noted Egli. Part of the reason could stem from USDA’s announcement in May 2005 that it would began to systematically add residual to the Chinese supplies to offset a tendency to underestimate Chinese production.
The adjustments, which added 10.75 million bales to Chinese supplies, “might have been justified three years ago, but they make little sense to me when there is obviously large-scale restocking going on in China,” Egli said. “Instead of 18.2 million bales back on Aug. 1, China probably had no more than 12 million to 13 million bales. This is why the Chinese market has been behaving like it’s been running out of stocks. It literally is running out of stocks.”
Egli also believes global beginning stocks should probably have been a lot lower for 2009-10. “Instead of 47 million bales, we may actually have had no more than 40 million to 42 million bales to begin the season, which changes the stocks-to-use ratio dramatically from 39 percent to almost 35 percent. At the end of this season, we may end up with less than 40 million bales unless we see demand destruction over the coming months.
“As mills began to realize that the stocks they needed to tide them over into new crop were limited, they started to mop up all available supplies they could find. Then we had the flood in Pakistan and the threat of an export ban in India, which added more fuel to an already panicky market. As a result, we had cash prices explode by over 35 cents since the end of July.”
Egli said that Chinese cotton prices are already trading at $1.60.