Dollar cotton in 2010 is riding the convergence of several bullish factors including a massive world production deficit in old crop cotton, the declining value of the dollar, strong technical signals and growing demand, according to Peter Egli, risk manager, Plexus Cotton, speaking at the Ag Market Network’s Oct. 12 teleconference.

Egli noted that over the last few years annual world cotton production deficits of between 2 million and 3.7 million bales have slowly but surely been whittling down burdensome world stocks. In 2009-10, however, the production deficit blew up to 16.4 million bales due to production shortfalls in major cotton-producing countries.

The deficit “is by far the biggest on record,” Egli said. “The jury is still out in regard to the current season. But at the moment, USDA projects another seasonal deficit of around 4.1 million bales.”

The behavior of the Chinese government only adds to the bullish theme, according to Egli. “There has been a massive effort to auction off reserve stocks to keep local markets supplied with cotton. Since May 2009, the Chinese government has auctioned off about 15.2 million bales of its reserve, a figure which does not include a recent allocation of about 1.3 million bales.”

So far, USDA statistics have not completely reflected this significant drawdown, noted Egli. Part of the reason could stem from USDA’s announcement in May 2005 that it would begin to systematically add residual to the Chinese supplies to offset a tendency to underestimate Chinese production.