Supply & Demand: Wake Me Up If The Chinese Call

USDA’s cotton supply and demand report released today confirms the paradox. With an estimated ending stocks of 9.7 million bales, nearby prices must be low enough to attract demand. Conversely, prices for out months must be high enough to attract acreage to meet increased consumption.

What that makes me - beyond being perpetually confused - is bearish for old-crop cotton and bullish for new crop.

Domestic ending stocks, despite severe reductions in acreage, have continued to build, going from 5.495 million bales in 2004/05, to 9.7 million for 2007/08. On the other hand, global demand has risen from 109.2 million bales in 2004/05, to 124.3 million for 2007/08. Ending stocks are projected to rise another 4.2 million bales in the 2008/09 marketing year.

Quite simply, the world is selling cotton and the U.S. is not. As a glaring example, our market share in China in the last marketing year dropped from 70% to 20%. We have lost the largest percentage of that market share to India. India has a lot of cotton and it’s cheaper than ours.

China coming back to the U.S. for cotton depends on one thing - India has to sell out. The predictions are that it will and increased sales of U.S. cotton will follow. The market reflects that. As of today, the spread between May and December on the New York Cotton Exchange increases nearly 11 cents. Demand says the Chinese will have to come calling. Our supply says we’ll have cotton to sell them when they do.