Monthly Financial Report

Written by:

Cotton Incorporated
www.cottoninc.com

Fundamentals of the global market and the US
June 2010

After falling a large part of May and the beginning of June, the NY nearby rebounded during the most recent trade commercial. Advancing the past days and surpassing the limit of 3 cents/pound on June 9th, NY nearby recovered the 6 cents/pound lost during the previous weeks. Volatility in the NY nearby coincided with instability in external markets due to the worries about the tax situation in Europe that is affecting the exchange type and the commodities’ market. In spite of the movement of the NY nearby, both December futures and prices of the A index remained relatively stable. The December futures were traded briefly below 75 cents/pound, but returned to the range of 76 to 80 cents/pound in which they have traded since the last days of April. The A Index, after falling below 90 cents/pound is currently over 92 cents/pound.

The current price levels reflect the situation of the limited supply and the demand. Final reviews of numbers in the most recent USDA report describe some marginally more adjusted fundamentals for this year’s harvest than those previously estimated. Structural reviews for Turkey and Peru, that increase the numbers of historical consumption for those countries, contributed to a reduction of 456,000 bales in the final global inventories of 2009/10 (62.7 million bales). The global production number for 2009/10 basically remained unchanged in 102.9 million bales, while the estimates of world consumption for 2009/10 increased by 535,000 bales reaching 116.4 million bales. Combined, reviews took the world production gap for 2009/10 to 13.5 million bales. This production/consumption gap represents 11.6% of consumption in 2009/10 and 25.9% of the final 2009/10 inventories (52.2 million bales).

With tight global cotton supplies, trade has been an extremely important issue during the 2009/10 harvest. Estimates of imports for China in 2009/10 grew to 800,000 bales during the last report, most probably a reflection of the increase in speed of purchases and the increase of 3.7 million bales in the import quota. Both  consumption and import estimates for Turkey for 2009/10 grew by 300,000 bales as part of their structural reviews. Following India’s announcement stating it would reduce restriction to cotton fiber exports, the estimate of exports from India for 2009/10 grew by 200,000 bales reaching 6.4 million bales. Export projections for the US increased by 250,000 bales reaching 12.3 million bales.
 
It is expected that cotton supply will remain adjusted in relation to demand for 2010/11. At 49.6 million bales, the current estimate for final world inventories in 2010/11 is 544,000 bales less that the past month’s number and 2.5 million bales less that the 2009/10 number. Reduction of final inventories of this month is due mainly to reduction of inventories of the 2009/10 harvest, as the raise in forecast of global production of 2010/11 (+437,000 reaching 114.3 million bales) more than compensates expectations of increase in consumption for 210/11 (+410,000 reaching 119.5 million bales). The countries with biggest changes in their production estimates were Australia (+200,000 bales) and Sudan (+125,000). The countries with biggest changes in consumption estimates were Pakistan (+300,000 bales) and Turkey (+100,000). Export numbers were reviewed for Brazil (+200,000 bales) and India (+100,000) and import numbers were reviewed for Turkey (+300,000 bales), Brazil (+215,000) and Mexico (-100,000).

It is expected that final global stocks will fall more than forecasted and world consumption will grow more than what has been estimated; the forecast for the stocks/use ratio for 2010/11 fell from 42.1% to 41.5% in the most recent report. The lower stocks/use ratio are usually linked to higher cotton prices, and it might be expected that the high price levels experimented in this year’s harvest could be maintained for the next 2010/11 harvest. With only a few months to go for the 2010/11 harvest, considerable uncertainty remains. Global weather has the potential both to benefit and harm production, while the strength and speed of recovery from recession has the potential to affect part of the consumption.

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