February 10, 2012

USDA’s supply demand report took a bit of steam out of the market that had seen December pushing 97 cents early in the week. Yet, the new crop 2012 December New York contract ended the week just above 92 cents. The 52 week high for December is 107.20 cents and the low is 83.25 cents. The 97 cent level seen earlier in the week became a bit too top heavy for the market as not only the supply demand report was negative, but grower hedging also weighed on prices.

The 52 week high‐low range should hold forth as the market moves to the spring planting period. The mid 90’s will be the prominent trading area. Market fundamentals have become a bit of a broken record as traders continue to talk about the world economy, lagging world cotton demand, a likely double digit percentage drop in Chinese planting, and the continuation of the 2011 Southwest drought. Additionally, the potential for the drought to spread appears to be on the horizon according to long range weather forecasts.

The February supply demand report was a bearish surprise. USDA reduced U.S. domestic consumption, increased U.S. carryover, increased world production, and decreased world consumption. These changes led to a big increase in carryover.

U.S. domestic consumption was lowered for the second consecutive month, this time just 100,000 bales and is now forecast at 3.5 million bales. U.S. carryover was increased a like amount and is forecast at 3.8 million. This represents a supply‐to‐use ratio of 26%.

The 2011 world cotton crop was increased by 505,000 bales due primarily to changes in Pakistan. USDA also performed some “house cleaning” as it adjusted its estimates for India back to both the 2009 and 2010 crops. Those adjustments added some 1.5 million bales to carryover. Consumption was lowered some 200,000 bales based primarily on events in Thailand and the U.S. World consumption is forecast at 109.8 million bales. Carryover stocks are forecast at 60.8 million bales, up sharply—2.4 million bales—from the January estimate of 58.4 million. It should be noted that this represents a 14 million bales increase above the year ago carryover level of some 47 million bales. The world stocks‐to‐use ratio stands slightly above 55% and is sharply above the prior two years and is akin to that in marketing year 2008‐09.

The new crop December has excellent support just above 90 cents, but remember we could venture back down to the mid 80’s before beginning a new rally. Be prepared to fix as much as 25% of your crop on a return to 96 cents.


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