April 3, 2012

 

Chinese demand lowers US cotton prices

 

 

Amid revived fears for Chinese demand, and concerns over higher values discouraging demand, US cotton prices eased on Monday (Apr 2), despite ideas that a key forecast for US sowings represents an overestimate.

 

Traders on Monday dispelled some of the negative sentiment inspired by Friday's USDA sowings estimates, which pegged US cotton area this year at 13.16 million acres, above market expectations of a 12.9 million-acre figure.

 

"The report was based on March first conditions leading many to believe that [the figure] will be the highest of the season," influential cotton analyst Mike Stevens said. "Veteran observers in the Delta and mid-south believe the switch to corn and soybeans will be considerably more than reflected in this report."

 

In Texas, the top cotton-producing state in the US, the top exporting country, "profitable contracts for milo and sunflowers, where there are none available for cotton, are possibly turning some heads also".

 

Peanuts have also emerged as a growing competitor to cotton in planning plans, with fertiliser giant PotashCorp saying that peanuts "are expected to provide above-average returns, making acreage of that crop likely to increase at the expense of cotton".

 

However, Goldman Sachs struck a blow to hopes for higher prices by, sticking with the USDA's headline sowings number, cutting its estimates for cotton futures.

 

The bank recommended investors take out a position in December put options, at US$0.85 a pound, which would profit when the value of the fibre, currently above US$0.90 a pound, fell below that level.

 

And Cotlook analysts stoked fears for Chinese demand, highlighted by the end on Saturday of a stockpiling programme, by cutting their forecast for the country's consumption in 2011-12 by 1.8 million bales to 39 million bales.

 

The USDA estimates demand in China, the world's biggest cotton consumer, at 43.5 million bales.

 

Cotlook's data suggested a world surplus of 20.3 million bales over the season, compared with the USDA's 14.9 million-bale estimate.

 

Furthermore, Mr Stevens said that a rally in prices last week appeared to have discouraged demand among importers for US cotton.

 

"I get the distinct impression that fresh sales have slowed," he said.

 

While technical factors "do not indicate the rally is anywhere near over, a sharp slowdown in export sales could make it tough going trying to get a clear cut breakout above US$0.95 a pound".

 

The benchmark May contract closed 0.4% lower at US$0.9312 in New York.