Holding Their Ground

By Jim.Robinson|March 17, 2009

In February, offtake was active and price was stable. Sales pressure was expected to increase in March due to impending distribution of cotton import quota. The price of cotton will probably remain stable if there is not a significant change in the fundamental side. Textile mills purchased some cotton in February and thus accelerated the sales progress. According to the National Cotton Market Monitoring System (NCMMS), cotton sales progress reached 52.64%, up 6.05% from January. Cotton imports were limited and the international cotton price was down. According to Chinese customs, China imported 125,000 tons of cotton in February, no significant change from January. Cumulative cotton imports from September 2006 to February 2007 were 860,000 tons, down 49.5% year on year.

Outlook

The cotton supply won’t be tight in the short term. Commercial stock will be kept at a high level, though merchants seem to be patient enough to wait and see. Of course, they won’t turn textile mills down as long as the price is satisfactory.

Demand from textile mills could decrease, with the wait-and-see psychology of textile mills likely to grow stronger. A NCMMS survey shows that the raw cotton inventory of textile mills had decreased to 46.5 days at the end of February, down 6.5 days from January. It should be noted that 63% of textile mills have the intention to purchase cotton in near term, down 16% from January. Meanwhile, 26% of textile mills have the wait-and-see psychology, up 12% from January. The reasons are as follows: first, some mills stopped cotton purchasing during the Spring Festival. Second, the policy of bale-to-bale bundling sales of domestic cotton and cotton import quota has attracted the attention of textile mills.

For the near future, price will probably remain firm in the international market. Besides the influence of impending cotton import quota of China, two other factors are also important: first, resistance against the U.S. cotton export sales is weakening. Relevant data shows that Indian cotton export has reached 680,000 tons as of early March, which accounts for two-thirds of its total export estimate in the 2006/07 marketing year. As a result, the price of Indian cotton is rising, which becomes a support to the U.S. cotton price. Second, the speculative long positions are increasing. Corn and soybean prices are in a bullish trend since the end of 2006. As an agricultural product, cotton is expected to be a target of hedge funds.