• 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 behavior of the Chinese government only adds to the bullish theme.
• Another bullish factor for higher cotton prices is the value of the dollar. But the dark side of this fundamental is increasing U.S. federal debt,
• Another contributor to the perfect storm in cotton is the technical uptrend of the market.
Make little sense
The adjustments, which added 10.75 million bales to Chinese supplies, “might have been justified three years ago, but they make little sense to me when there is obviously large-scale restocking going on in China,” Egli said. “Instead of 18.2 million bales back on Aug. 1, China probably had no more than 12 million to 13 million bales. This is why the Chinese market has been behaving like it’s been running out of stocks. It literally is running out of stocks.”
Egli also believes global beginning stocks should probably have been a lot lower for 2009-10. “Instead of 47 million bales, we may actually have had no more than 40 million to 42 million bales to begin the season, which changes the stocks-to-use ratio dramatically from 39 percent to almost 35 percent. At the end of this season, we may end up with less than 40 million bales unless we see demand destruction over the coming months.
“As mills began to realize the stocks they needed to tide them over into new crop were limited, they started to mop up all available supplies they could find. Then we had the flood in Pakistan and the threat of an export ban in India which added more fuel to an already panicky market. As a result, we had cash prices explode by over 35 cents since the end of July.”
Egli said that Chinese cotton prices are already trading at $1.60.
According to Egli, high prices of 2010 are unlike the high prices of March 2008, “when a liquidity squeeze in the futures market pushed prices higher, while the cash market never followed through. This time, the cash is leading the way and the futures market has been playing catch up. It is an extremely bullish sign.”