AQCA Market Report

February 4, 2010

Since our last AQCA market update cotton futures prices have made significant movements in both directions.  The Dec 2010 contract traded as high as 78.25 in late November and now threatens to move below the 70-cent level.  During the same period, Mar 10 futures have made a move up to 76 cents and recently traded below 69 cents.  While we expected the market to sell off from the November highs, we are surprised that the market does not yet seem to have found a bottom.  The good news is that we were able to take advantage of the previously higher prices in the mid to high 70's and trade futures and options for a profit.  That was reflected in your January progress payment of 6 and 8 cents in the seasonal and aggressive pools, respectively. 

Recent lower futures levels have created quite a buzz among growers across the belt.  Current prices are not at all reflective of fundamentals.  With the retreat of spec funds from the market, prices have dipped lower than most predictions.  Could prices go lower?  Sure they could, especially in the short term, but extreme tightening of stocks in the US and around the world tell us that cotton should trade higher.  Open interest continues to wane as longs exit March and cotton altogether.  The huge weekly export sales number of nearly 520,000 bales released this morning hasn't been able to reverse the market's downward momentum.  Once again, on the heels of bullish fundamental news, the market trades lower.  Export demand will remain strong, especially as long as futures remain in the 60's.  China will be out of the market 2 weeks this month with their New Year's celebration, but demand is solid from other importers as well.  Lack of carry has also been a concern as of late.  Currently we do have carry from March to May, but beyond that, the board is flat.  As certificated stocks build, conventional wisdom says that carry will eventually develop across the board, unless the certificated stock becomes price competitive with US cash values.

The drawdown of stocks points to an extended period of higher prices.  World ending stocks will be a drastic 15% lower than when the marketing year began.  Furthermore, US ending stocks are projected to be only 4.3 million bales compared to 10 million just two years ago.  Demand is actually outpacing production and that trend should continue.  Acres should be up in the US, Brazil, Pakistan and others, but probably not up as much as consumption will be.  Projections of a 15 million bale US crop next year, even though significantly higher than this year, will result in similar ending stocks for 2010-11.  That being said, a spike in exports or a crop failure in this country would lower US stocks even more, possible creating a supply crisis in this country.  In the nearby, we could see higher prices again as we approach planting, but will likely move only high enough to buy acres.

Thanks for your business, and please let us know if we can ever be of assistance to you.

Best regards,

Cargill Cotton