Will Indian Cotton Export Ban Boost Prices again?

Following today's export ban by India, the question many are asking is if this move could be enough of a driver to propel prices to approach last year's highs.

In short, no, we do not see India’s suspension on cotton exports as enough of a catalyst to propel cotton to another rally similar to the 2010/11 surge that peaked well over $2.00/pound. Certainly, India is the second-largest producer and exporter of cotton in the world, and this move is likely prop up prices, if not give a boost to the market. But global fundamentals are quite different this year vs. last year and recent momentum was pointing to looser fundamentals ahead, unlike prospects for gradually tighter fundamentals witnessed about 1.5 years ago. What’s more, last year’s spike was the culmination of a ‘perfect storm’ of bullish ‘waves’ that all crashed together at the same time. These included tighter U.S & global balance sheets, record volatility, record backwardation, an unprecedented short squeeze in the U.S., and the weakest dollar in years, among a few. Today’s market certainly reflects a much different landscape.

Perhaps most importantly, today’s soft demand across the global textile supply chain is likely to keep cotton reined in well short of last year’s spike above $2.00/pound, regardless of India’s latest policy move.

Weekly Commodity Market Recap: Cotton

Cotton markets in the U.S. and around the world edged lower again last week on persistently weak demand prospects, but two new policy moves could limit downside potential well into the spring. ICE cotton futures shed 192 points for the week to settle at 88.23 cents per pound, the lowest weekly close since mid-December. Cotlook ‘A’ Index prices, a proxy for world cotton prices, dipped 70 points from a week earlier to 97.45, the lowest since the start of this year. While sentiment is gathering steam for lower Northern Hemisphere cotton plantings this spring, the demand side of the balance sheet continues to weigh on the global cotton market.

This weakness is spread both geographically and across the supply chain, from East to West and from yarn spinning to retail sales. Most recently, mills in Thailand and South Korea reported another month of soft demand for their textiles, suggesting cotton consumption forecasts for both markets are overstated. Owing to record unit costs and weak foreign demand, Pakistani exports of cotton fabric sank the most in years in January, with volume plunging to the lowest January in more than a decade. Even retail was not immune. While some markets reported upbeat sales, others—like Italy—saw a disappointing December shrink garment sales for the fourth straight year. Until price pressures ease across the breadth of the supply chain and retail demand in several key markets shows sustained signs of a rebound, upstream textile output may remain restrained, weighing on cotton prices.

But at the same time, two new policy developments could help prop up global cotton markets, offsetting some of this bearish weight looming over the market. First, Thursday China announced it planned to boost the Reserve procurement price for cotton starting this autumn. Many believe the move is to partially offset what is likely to be a widespread decline in Chinese cotton plantings this spring. While only a modest 3% increase from the current procurement price to 20,400 yuan per ton ($1.47/pound), the implication is that spot and forward market prices in China—and by extension, around the world—may remain firm through 2012 as well.

The second policy development came Monday from India’s Directorate General of Foreign Trade (DGFT), announcing an immediate suspension of Indian cotton exports. While rumors circulated for days that this move was imminent, the announcement plunged local Indian prices while helping propel ICE cotton futures limit up in early Monday trading. While some in India welcomed the move, others called it regrettable. The perceived rash move is reminiscent of what the market saw almost two years ago when India—the world’s second-largest cotton exporter—last tinkered around their cotton trade policy. Doing so this year—with Chinese mills now as major buyers—could give another black eye to the reputation of the Indian shipper on the global market. Over the last two years, Pakistani mills bore the brunt of the cancelled Indian shipments. But this year it will be the Chinese left empty-handed. We suspect these jilted spinners may not soon forget, suggesting increased inquiries to U.S. merchants & co-ops at a time of relatively thin uncommitted exportable supplies.

Weekly Commodity Market Recap: Cotton

Domestic and global cotton prices trickled lower last week, burdened by weighty prospects for weaker cotton textile output in India and expectations of bulging global inventories of the fiber by the end of the next marketing year. At 87.48 cents per pound, ICE cotton futures Thursday touched their lowest so far this year before rebounding modestly Friday. Prices across every contract month retreated for the week, with several touching their lowest weekly settles so far this year. Foreign growths also joined the slide, with the ‘A’ Index tumbling 120 points Friday to a seven-week low of 98.15 cents. In China ZCE cotton futures sank across all contract months again Friday, with several reaching the lowest settles in more than six weeks. Total open interest expanded for the fifth straight session, stretching to a five-month high. The hemorrhaging also continues unabated for a range of Indian spot quotes, down sharply last week to the lowest levels this year. The widespread—if relatively modest—erosion in prices around the world last week reflects mounting bearish evidence hinting at looser balance sheets, both this marketing year and next.

Two key fundamental drivers impacting the market last week were from India and the USDA. First, early in the week came news that Indian cotton yarn production sank again in December, down -16.1% from a year earlier, the eighth straight month of double-digit year-over-year losses. This disappointing contraction in output confirmed 2011 as the worst year in at least a decade for the local cotton spinning sector. What’s more, the plunge reinforces our earlier view that cotton consumption forecasts by the USDA and India’s Cotton Advisory Board remain too generous. If these projections are whittled lower in coming months, Indian and global balance sheets for the current marketing year are likely to loosen, pointing to softer prices ahead.

The second key news for the week came from the USDA’s annual Agricultural Outlook Forum held near Washington, DC late last week. While unofficial, a tentative new-crop global balance sheet presented by USDA economists indicated world cotton production was likely to outpace mill demand for the third straight year in 2012/13. If so, ending stocks by the conclusion of the next marketing year are likely to rise, perhaps to a record 64.8 million bales. If this projected balance sheet comes to fruition, it will denote the loosest global fundamentals in eleven years, implying softer prices may lie ahead in 2012/13. Indeed, in a speech at the Forum, USDA Chief Economist Joseph Glauber expects crop prices to fall in the new marketing year, with cotton averaging 80 cents per pound. With futures presently closer to 90 cents and ‘A’ Index quotes even higher, last week’s erosion in price may be only a modest, early slip in a more protracted tumble to much lower prices later in 2012.

INTL FCStone 2nd Annual Agricultural & Economic Outlook Meeting: March 1 & 2, 2012

Managing the commodity price risk demands insight into many different segments of the commodity world. This Market Outlook meeting will enable attendees to explore both domestic and international issues affecting markets for the upcoming crop year. Click here to view the agenda and list of speakers or to register.

A Peek Behind the Curtain at USDA Balance Sheet Forecasts for Cotton 2012/13

For an early, unofficial peek @ USDA's 2012/13 cotton balance sheets for US, China, & world, please see http://goo.gl/z2APj. USDA cotton economists echoed USDA Chief Economist Joe Glauber yesterday, saying A-Index is expected to average between $.80-$1.00/pound in 2012/13. Good stuff starts after pg 10. Enjoy!

FCStone Annual Outlook Conference: June 15-16, 2011

The 2011 INTL FCStone Outlook Conference focuses on examining supply and demand factors in uencing every major food-related commodity, as well as price in uencers such as interest rates, energy, currencies, governmental legislation and regulations, and global weather patterns.

This year's theme is "The Most Important Subject on Earth," an acknowledgment of the critical importance of food, at a time when political and economic disruptions, rising energy prices and controversial new technologies are bringing food supply and demand issues to the forefront of
the global agenda.

The continuing turmoil in the Middle East — exacerbated at least in part, according to many commentators, by food shortages and rising food prices in the region — will be addressed by the conference's keynote speaker, Shahar Arieli, Deputy Consul General of Israel to the Midwest.
His keynote address will help conference attendees understand what's happening in the region, and how various scenarios are likely to a ect food and energy prices in the months and years ahead.

Representatives from major U.S. and European exchanges will discuss new developments in global risk management tools. The influential market analyst David Hightower, publisher of The Hightower Report, will present his global financial outlook. Hightower, who has been a market analyst for more than a quarter century, is a frequent guest on CNN and Bloomberg TV. David Oppedahl, an economist for the Federal Reserve Bank of Chicago, also will offer a macroeconomic perspective on the U.S. and global economies.

For the full agenda or to register to attend, click here for more: http://www.intlfcstone.com/seminars/outlook/Pages/default.aspx

Weekly Commodity Market Recap: Cotton

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The ‘ascent’ portion of cotton’s roller-coaster ride continued last week, with a weak dollar and global supply concerns driving the market higher. While trading on the ICE Futures U.S. was constrained to an inside weekly range, nearby December prices still jumped 984 points from last week’s finish to 119.71 cents/lb by Friday afternoon, the highest weekly close in 140 years. This latest advance marks the thirteenth higher weekly close in the last sixteen weeks. Not since another supply constraint—a northern blockade of southern commerce during the American Civil War in the 1860s—have cotton prices been as high.

Issues driving the market last week primarily came from developments in China and the U.S., together accounting for about two-fifths of global cotton production. In China, an unexpected bump in interest rates—the first since 2007—sent traders scrambling. The action could hinder textile exports from the world’s largest textile producer and help curb excessive speculation in some markets. While this bearish news normally would be likely to exert some pressure on domestic prices, fundamental support remains intact and local cotton prices are still on the rise. On balance, late-week declines in the dollar overshadowed its Tuesday rebound from the interest rate move, pulling the greenback even lower and boosting prices for a range of commodities—including cotton—even higher.

Across China, new weather concerns discussed here are dimming producers’ sentiment for yield, production, and quality across much of the country. Parts of Anhui, Shaanxi, and Xinjiang reported either cooler or wetter conditions over the last week, unwelcome news for the world’s largest cotton producer. What’s more, this weekend a new northern cold front plowed south across unpicked cotton in China, bringing more strong winds, colder temperatures, and unwelcome rains to much of China. The country’s main meteorological agency is calling for temperatures to plunge 14-16 °C shortly in Hebei, Shandong, and Jiangsu, slowing harvesting and hurting fiber quality. Already, key forecasting organizations are paring back their projections—again—for the size of this year’s China harvest.

By Friday, the market soared limit up on news of heavy overnight rain and hail across the Texas High Plains discussed here. Almost four inches of rain Thursday evening pounded fields full of beautiful pre-sold cotton, suggesting yield losses and discoloration may be in the offing for the local crop. With bolls open on virtually all the state’s cotton but the Texas harvest only one-quarter complete, the timing could not have been worse. While damage estimates are premature right now, early guesses figure 50,000 to 100,000 bales may have been lost.

The same old approach for spinning mills of buying on-call and hoping for a pullback is going wrong in the worst of ways. Conditioned by years of oversupply, temporary price spikes, and virtually no risk management, spinners outside China have been caught unprepared for the great bull market of 2010 as the balance sheet continues to tighten. While there is grumbling in the mill community about idling spindles rather than running such expensive cotton, there still is scant evidence that demand is ebbing. After the market recovered so quickly from last week’s sell-off, we see little to stop it from making new highs in the coming week. To learn more about how we can help you better manage this exposure with a comprehensive risk management strategy to protect against the market’s peaks and swoons, please click here.

Weekly Commodity Market Recap: Cotton

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Cotton saw one of its most volatile periods on record last week, driven by a rush of panic buying and then panic selling as futures soared to unprecedented heights, only to tumble limit-down late in the week. Those two old market movers—fear and greed—clearly were in play last week, only on different days, it would seem. Cotton traded to new highs three different days, only to see its biggest collapse—and widest one-day range—in years by Friday. On balance, for the week the market touched record-high prices, ranged over 1,255 points, and covered an unheard-of 993 points on Friday alone.

Trading on the ICE Futures U.S. began the week with a bang, soaring limit-up on news that India had suspended registrations of cotton for export this year, only ten days after opening the registration period. Indian traders had already registered the government’s maximum of 5.5 million bales, reflecting not only soaring foreign demand but locals’ concern that the government may hinder cotton exports again in coming months.

Following Tuesday’s consolidation and an inside day Wednesday, the market was poised for another climb and test of its all-time record high Thursday. A confluence of several factors around the world helped propel U.S. cotton futures dramatically higher this day. First, cotton on China’s Zhengzhou Commodity Exchange closed limit-up on near-record open interest, following news of mills’ unusually low cotton inventories across the country. Next, news from India further fueled this bullish fire. The country’s textile sector redoubled its calls to the government to postpone cotton exports until 2011, to the panicked dismay of importing mills across Asia. Also, disappointing economic reports in the U.S. paved the way for further quantitative easing by the Fed, dragging the dollar lower and pushing commodities higher. As a result, all 2010/11 contracts closed limit-up again. Synthetic prices for December closed at 118.87 cents/lb, setting a record high in the 140-year history of the exchange.

After gapping higher on follow-though trading, the bulls lost their appetite in early Friday action and the bears ruled the day. From the intra-day high of 119.80 cents/lb—a record—the market plummeted an astounding 993 points to settle limit down at 109.87, crashing -8.3%, the largest non-synthetic daily range ever.

In spite of Friday’s tumble, cotton futures still managed to rise for the week, up for the twelfth time in the last fifteen weeks. Several factors support this string of gains to the highest weekly close in fifteen years. Unfixed call sales stand at a record level here, and many spinners still need to buy December to fix their on-call purchases. Surging U.S. export commitments detailed here remain on a record pace, despite a modest start to shipments this marketing year. And suspicions are rising here of disappointing yields in China, hinting at more imports in coming months. Not to mention, the impact from a weaker dollar and bullish specs and funds cannot be overstated. With little fundamental history to suggest a price range for the market and constrain these volatile swings, it appears these wild fluctuations may persist, reflecting the need for a comprehensive risk management strategy to protect against the market’s peaks and swoons. To learn more about how we can help you manage this risk, please click here.

Weekly Commodity Market Recap: Cotton

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Cotton rebounded impressively last week on the ICE Futures U.S., buoyed by a converging swell of different factors that lifted the market to the highest levels in years. Nearby December futures soared 915 points on the week to close Friday at 107.17 cents per pound, the highest close in more than fifteen years. The market has risen eleven of the last fourteen weeks, tacking on 37.7% in less than three and a half months, one of the steepest and biggest gains ever recorded. Every contract enjoyed the upswing last week, with several climbing to life-of-contract highs Friday. From China’s return from holiday to India’s soaring export registrations to tighter fundamentals to a weaker dollar, several issues were at play to boost cotton prices last week.

First, the siren song of soaring spot and forward markets in China helped propel global cotton prices higher. After returning from the week-long National Day holidays, Chinese traders wasted little time in driving cotton prices on the Zhengzhou Commodity Exchange limit-up late in the week. While harvest weather was favorably dry across much of the country during the break, picking remains behind schedule and mills’ appetite for the fiber remained voracious, in spite of even higher prices. Accordingly, traders were in no mood to be caught short, particularly given the rebound in ICE prices during the holiday. Every ZCE cotton contract soared late in the week with most reaching life-of-contract highs, and China’s CNCE closed limit-up two sessions in a row, helping justify the gains on the ICE.

Next, an impressive—and largely unanticipated—surge in cotton registrations in India threatens to cap this outlet for forthcoming exports, and may fan the protectionist flames further against additional shipments abroad, driving prices higher. The Indian government’s window for shippers and merchants to register new exports for later shipment is slamming shut just ten days after first opening. Since October 1st, traders already applied for export permits totaling 5.5 million bales, equaling the government’s entire export allocation for the marketing year imposed here. The surge reflects both desperately low inventories in mills across Asia and traders trying to ship as much cotton as possible, as soon as possible, both before the tax-free limit of 5.5 million bales is reached and in case the government restricts exports again. While we demonstrated here that the harvest will easily surpass domestic mills’ needs for the eighth straight year, we do not look for the government to ignore the demands from the local textile industry and raise cotton export limits soon. As we showed here, despite its best of intentions, the government’s meddling in open-market cotton trade to contain domestic prices is backfiring and helping propel both Indian and global cotton prices higher.

Additionally, the USDA added further fuel to the bullish fire in its latest WASDE report. The October balance sheet released late last week here pointed to tighter global fundamentals than earlier anticipated, helping strengthen prices further. In particular, world ending stocks were revised lower from last month’s 45.4 million-bale forecast to 44.7 million. The biggest changes came in China, where anticipated production fell one million bales to 31.5 million. Chinese beginning and ending stocks shrank and forecasted imports climbed. As a result, the world stocks-to-use ratio declined even further from last month’s 37.7% to 37.0%, the lowest in sixteen years, concurring with the highest year-to-date average prices also in sixteen years.

Finally, outside the world of cotton, the U.S. dollar continues to plumb new depths, helping to boost prices for a range of export commodities. The U.S. dollar index fell for the fourth straight week as monetary policy remains exceedingly loose, settling at 77.563 Friday, its lowest close in almost nine months. Friday’s less-than-stellar U.S. employment report exacerbated worries over the U.S. economy. And following the weekend IMF summit that failed to ease tensions over a festering international ‘currency war’, the Federal Reserve is set to provide additional stimuli to the sagging economy, which is likely to weigh on the dollar and boost commodity prices even further.

Weekly Commodity Market Recap: Cotton

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In anticipation of the USDA’s next release in coming days of the latest U.S. cotton supply and demand projections for new-crop cotton, FCStone prepared forecasts and commentary on how these projections may change from recent months:

U.S. production for 2010-2011: Down 300,000 bales to 18.5 million bales. While yields are still likely to be well above last year, crop conditions generally have eased gradually over the last two months across much of the cotton belt, suggesting yields may not be as robust as earlier anticipated. While this trend is happening in several states, we are keeping a close eye on Texas and the Carolinas. Here, the northeastern corner of the cotton belt received well over eight inches of rain last week, drenching open-boll cotton and fading harvest prospects. Also, the condition of the Texas crop still in the field has eroded to the lowest since June, dimming earlier optimism somewhat.

U.S. Exports: Up for the fourth straight month, rising from 15.5 million to 15.7 million bales. Already, early-season commitments stand at a record 8.9 million running bales, hinting at robust exports later this marketing year. Adverse pre-harvest weather in several cotton-growing areas of China was unwelcome and may hinder production and quality, suggesting the world’s largest importer may need to import even more fiber in 2010/11, with much of that coming from the U.S. What’s more, delayed exports from India discussed here also could bode well for shippers in the U.S. and Australia this marketing year.

U.S. Ending Stocks: With a likely smaller anticipated supply and projected demand bigger from last month, ending stock forecasts for October are likely lower by 500,000 bales from September to 2.2 million bales, the lowest level in more than five decades. Unsurprisingly, recent daily closes on The ICE here touched the highest levels in years in response. We look for the USDA to find expectations of higher demand and lower ending stocks will tighten the anticipated stocks-to-use ratio this year to closer to 14%. This would be the tightest ratio since 1994/95—the last time average prices were as high—and supportive of elevated prices well into the winter.

In spite of this increasingly tighter outlook for U.S. cotton fundamentals, we caution that any increase in U.S. prices may not be commensurate with the tightening in the balance sheet, as it has been over recent months. As the graph below demonstrates, the jump in futures prices has outpaced the tightening in the stocks-to-use ratio over the last two months. And October’s anticipated 12% ratio—while tighter than any point in years—still is not tight enough to support average September prices, let alone even higher prices in October. This extrapolation brings with it the pitfalls inherent in any extrapolation; we caution that October prices even could slide modestly lower, despite the tighter outlook for the domestic market.

While the anticipated tighter evolution of domestic fundamentals is impressive, we temper this outlook with a forecast for looser global balance sheet. In particular, we look for the Indian harvest to jump to a record size, on the strength of unprecedented yields. That having been said, it may be a few months before Indian policymakers allow new-crop shipments to resume, suggesting global exports—and world prices—may remain dear through the conclusion of harvest.

Weekly Commodity Market Recap: Cotton

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Futures trading in New York firmed again last week, driving nearby prices to the highest levels in more than fifteen years as near-term supply concerns around the globe remain a dominant issue. At 99.93 cents per pound, Friday’s finish closed out the tenth weekly increase in the last twelve weeks. In fact, earlier in the week futures gapped as high as 103.55 cents before retreating lower to finish the week up 232 points. Backwardation remains endemic in every contract through 2012. The most-active December contract is up an astounding 26 cents—or more than 36%—in just two months, reflecting both a weaker dollar and concern over shorter crops and tight supplies in a number of markets.

First, the dollar continues to sink lower, boosting export-dependent commodity prices. Dollar Index futures tumbled for the fourth time in five weeks last week, crashing through support to 79.599 Friday, the lowest close in six months. Loose, accommodative monetary policies reinforced by Federal Reserve comments again last week are sure to keep the greenback under pressure for the foreseeable future, suggesting firmer cotton prices may rule for some time.

Next, crop prospects in key markets remain tilted in a more pessimistic—rather than optimistic—direction, further supporting the bulls’ position. The latest cotton assessment in the U.S. shows crop conditions are eroding from early this summer, suggesting yield prospects may fade in tandem as we suggested here. In particular, the USDA recently declared topsoil has turned “short or very short” of moisture over a large percentage of the South. Coupled with unwelcome weekend rains over open-boll cotton in much of the area, prospects for yield and quality could dim further, supportive of price.

China’s crop also remains a concern, plagued by late plantings this spring and heavy rains this fall that are delaying the harvest. Evidence here shows every key cotton-growing region in the North China Plain is seeing cumulative precipitation this season much heavier than normal. What’s more, many of these showers have fallen in recent days, when the crop needs dry days and cool nights to reach full potential. Instead, picking is delayed and the crop in the world’s largest producer could be compromised. In response, over the weekend China announced plans to expand its reserve auction by another 400,000 metric tons to 1.0 million tons, in order to ease near-term supplies for local mills. This move did little to ease panic buying, with every ZCE futures contract month surging to life-of-contract highs.

In light of these bullish indicators, the question remains how much of this sentiment is already factored into the market. While calling a top in a runaway bull market like this is a fool’s game, we take caution that any continued tightening in the fundamentals mostly may be priced into the market already. Futures may have further to climb this fall, but we remain wary of the volatility and look for any continued tightening in the fundamentals to have a more muted impact on driving prices higher.

Weekly Commodity Market Recap: Cotton

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Nearby cotton futures surged last week to a fifteen-year high at 97.61 cents/lb, closing up 674 points, the second-biggest weekly leap in more than two and a half years. The latest jump extends a trend witnessed over the last six months, and especially over recent weeks. Friday’s finish closed out the ninth weekly increase in the last eleven weeks. The most-active December contract is up an astounding 25 cents in less than two months, reflecting both a weaker dollar and near-term supply concerns for the crop.

The U.S. Dollar Index retreated late in the week to its lowest since early August and soon could fall to the lowest in more than a year and a half, depending on Fed Reserve actions later this week. While the Fed isn't likely Tuesday to change its assessment of the U.S. economy or indicate a fresh round of asset purchases, there is an outside chance it could engage in a new round of stimulation, which would further weigh on the dollar and could boost export-dependent commodity prices further.

On the supply side, the market continues to fret over inclement weather impacting much of the Indian and Chinese crops. After a late start to the season, India’s monsoon is threatening to overstay its welcome. For fifteen of the last sixteen days, widespread showers across the country have outpaced daily norms, prompting speculation the harvest size may be smaller—or at least later—than forecast if monsoon rains last longer than normal. Already, the Confederation of Indian Textile Industries is calling for the government to delay cotton exports from October to January. Naturally, a postponement from the world’s second-largest exporter could drive global prices higher as importers scramble, but even the threat of more policy meddling is boosting prices.

In China, foul weather similarly is delaying the crop and may whittle back the harvest size. By late last week, only 5% of the nationwide crop was picked, well behind the 13.6% pace averaged over recent years. And cooler, rainy weather last week in key provinces did little to hasten the harvest, increasing the risk that wintry weather could compromise yields and quality in coming weeks. What’s more, daily offtake of reserve auction supplies has expanded to more than 20,000 tons each of the last eight sessions, supporting our view here that these supplies may expire before ample new-crop volumes enter the market. In response, spot and forward prices in China continued to advance. CNCE, ZCE and physical prices posted strong gains, with every ZCE cotton contract climbing to life-of-contract highs.

The tightest global fundamentals in fifteen years are supporting the highest global cotton prices also since the mid-1990s, with little opportunity for supply-side pressures to ease in the months to come. The ‘A’ Index breached $1.00 per pound recently, while Nearby prices in the U.S. also are on the cusp of closing above one dollar for the first time in years. What’s more, looking to the conclusion of the northern hemisphere harvest, crop concerns could materialize in spots other than China and India, further propelling the market higher. So while specs continue to pile into the boat for easy sailing today, it will pay to cast an eye to the horizon in 2011 for any tumultuous waterfalls ahead.

Weekly Commodity Market Recap: Cotton

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The bulls extended their run on the market last week, with support from anticipated tighter fundamentals in several key countries firming the outlook. The most-traded December 2010 contract on the ICE Futures U.S. rose for the seventh time in the last eight weeks, closing Friday at 91.29 cents per pound, the highest in more than two years. Even more impressive, earlier in the week the nearby October contract closed as high as 91.32, a fifteen-year high. Perhaps more significantly, the fact that each of the next ten cotton futures contracts are backwardated all the way until December 2012 shows just how tight world stocks have become, with little relief likely until well into the new marketing year, at the earliest.

The latest USDA WASDE report released Friday morning re-confirmed this tightness in the market. In spite of a bigger harvest forecast, gains in demand projections easily outpaced higher revisions to supply, implying lower stock levels. In fact, expected exports for this marketing year jumped 500,000 bales to 15.5 million, the second-highest volume in history. As a result, the USDA pared back 2010/11 U.S. ending stocks to a scant 2.7 million bales, the lowest level in fifteen years, closely mirroring our forecast here. In turn, expanding demand and lower inventories drove September’s forecasted stocks-to-use ratio lower to just 14.1%, the lowest since the mid-1990s, concurring with the highest domestic prices since the mid-1990s.

While not as dramatic, the net result of changes in the global balance sheet echoes the tighter conditions seen in the U.S., driving world cotton prices even higher. Forecasted ending stocks for this marketing year eased lower from August to just 45.4 million bales, also tightening the projected stocks-to-use ratio to the lowest in fifteen years. Naturally, global cotton prices are up again on the outlook. Already, every forward contract on China’s Zhengzhou Commodity Exchange now stands at a life-of-contract high, and the most-distant July 2011 contract settled Monday at 19,200 yuan/ton ($1.29), a record. Similarly, the ‘A’ Index, a proxy for global cotton prices, breached $1.00 per pound Monday for the first time since 1995, trending in mirror-opposite fashion to the plunge in global fundamentals.

Looking ahead, two opposing issues cloud the medium-term forecast. First, spinners worldwide are complaining that climbing yarn prices have not been commensurate with rocketing cotton costs. Naturally, this implies even tighter margins for many yarn mills that have little margin to spare. In fact, anecdotal reports are emerging of some yarn operations idling spindles and selling their cotton inventories to capitalize on the jump in price, something unsustainable longer-term. But arguing for the bulls, excessive recent rains in key areas of China and India could dampen prospects for yield, quality, or at least timeliness of the pending harvest. While the trend remains our friend, a global textile supply chain already dealing with razor-thin margins will be in no mood to support elevated fiber costs in the long term. Nearer term, while the fundamentals do not support a sustained retracement, we would not be surprised to see prices begin to plateau as the northern hemisphere harvest commences.