A Service Provided by Plains Cotton Cooperative Association

July 9, 2010

Weekend rains in Texas boosted prospects for the 2010 U.S. cotton crop, but drove futures prices on the Intercontinental Exchange (ICE) to four-month lows this week as the demand outlook weakened in tune with bearish economic cues, explained one trader. Other industry observers disagreed.

"Many will claim that this week's drop in cotton prices was due to the yield-increasing rainfall in West Texas where six to 12 inches of moisture all but assured a 10-million-bale Texas crop," an analyst said. "However, the amount of precipitation was well known prior to the market opening this week. I would suggest the weakness instead came from technical considerations as prices broke down through important chart points," he concluded.

December cotton futures prices skidded further on Thursday as traders sold in anticipation of bountiful U.S. crop estimates from USDA to be released on Friday morning. However, the new supply/demand report held no surprises as the data fell within the range of market expectations.

The department's 2010-11 cotton projections for the United States included higher production, domestic mill use, exports, and ending stocks compared with last month. Estimated production of 18.3 million bales was raised nearly 10 percent from the June estimate due to higher planted area, as reported in the June 30 acreage report, combined with lower expected abandonment and a higher average yield per harvested acre. The projected abandonment rate and yield were adjusted to reflect early July crop conditions in the Southwest which were the most favorable since 1994-95. Domestic mill use was raised marginally on stronger recent activity. Exports were raised sharply due to the projected larger available supply and strong foreign demand. While ending stocks of 3.5 million bales were 700,000 bales above last month, the stocks-to-use ratio of 20 percent remained relatively tight.

This month's world 2010-11 projections showed higher production which was mostly offset by lower beginning stocks. Beginning stocks were reduced mainly in Pakistan due to adjustments in production beginning in 2007-08 and reflecting reduced estimates of average bale weights. Production for 2010-11 was raised in the United States, Brazil, and Uzbekistan but lowered in Pakistan. World consumption was raised slightly based on increases for Turkey and the United States. World trade was supported by projected higher import demand by Pakistan, Turkey, and China. World ending stocks were marginally higher than the June projection, and the world stocks-touse ratio was the smallest since 1994-95.

Meanwhile, USDA also released another healthy export sales report this week. Net sales of 118,500 bales of U.S. cotton in the week ended July 1 were up two percent from the previous week but down 58 percent from the four-week average. China, Mexico, and Taiwan were the top buyers. Net sales of 278,600 bales for delivery in 2010-11 were mainly for China, Mexico, and Turkey.

Export shipments reached a marketing year high of 357,200 bales, a 24 percent increase from the previous week and up 32 percent from the four-week average. Major destinations included Turkey, China, and Mexico.

On the spot cotton market, growers in Texas, Oklahoma, and Kansas sold 1,151 bales online in the week ended July 8, compared to the previous week when 422 bales were traded.