Presentation is loading. Please wait.

Presentation is loading. Please wait.

MAKING SENSE OF COTTONS METEORIC RISE 2010/2011 Wally Darneille April 27, 2011.

Similar presentations


Presentation on theme: "MAKING SENSE OF COTTONS METEORIC RISE 2010/2011 Wally Darneille April 27, 2011."— Presentation transcript:

1 MAKING SENSE OF COTTONS METEORIC RISE 2010/2011 Wally Darneille April 27, 2011

2 BACKGROUND AFTER MAKING A SHARP SPIKE TO AROUND $1.00 PER POUND IN 2008, COTTON WENT TO ALL TIME HIGHS IN 2010 / MAY 2011 FUTURES ON I.C.E. HIT $2.20 PER POUND IN MARCH DECEMBER 2011 FUTURES REACHED $1.44.

3 WHAT HAPPENED? WHY? WHERE ARE WE GOING FROM HERE?

4 THE PERFECT STORM FIVE STRAIGHT YEARS OF CONSUMPTION WHICH EXCEEDED PRODUCTION DREW WORLD STOCKS TO A DANGEROUSLY LOW LEVEL. WORRIES ABOUT RETAIL SALES KEPT TEXTILES AND APPAREL INVENTORIES DANGEROUSLY LOW. WEATHER PROBLEMS IN THE U.S., CHINA, AND PAKISTAN HURT THE 2010 CROPS. FINANCIAL INVESTMENT IN COMMODITIES BROUGHT HUGE LEVERAGE TO AN ALREADY BULLISH FUNDAMENTAL SITUATION.

5 Continuous Cotton Monthly NEW ALL-TIME HIGH Updated 04/14/2011

6 Continuous Cotton Weekly NEW ALL-TIME HIGH Updated 04/14/2011

7 JULY 2011 DAILY CHART Updated 04/14/2011

8 DEC 2011 DAILY CHART Updated 04/14/2011

9 COTTON HAS BEEN THE LOSER IN THE ACREAGE COMPETITION SINCE ABOUT 1995, THE PRICE OF COTTON RELATIVE TO COMPETING CROPS HAS BEEN STEADILY DECLINING. THATS WHY WE LOST ABOUT TEN MILLION ACRES WORLDWIDE TO OTHER CROPS. WE BOUGHT BACK ABOUT FIVE MILLION ACRES IN 2010, BUT IT STILL WASNT ENOUGH TO BALANCE SUPPLY WITH DEMAND. WITH THE RISE IN 2010 CROP PRICES, WE WILL SEE INCREASED ACREAGE IN 2011.

10 Cotton Valued in Wheat 1975 to Present Bushels / Bale Updated 04/12/2011

11 Cotton Valued in Corn 1975 to Present Bushels / Bale Updated 04/12/2011

12 Cotton Valued in Soybeans 1975 to Present Bushels / Bale Updated 04/12/2011

13 COTTON GOT TOO CHEAP COMPARED TO OTHER STORES OF VALUE THE FINANCIAL CRISIS OF 2008 REQUIRED MASSIVE INFUSIONS OF RESERVES AND GUARANTEES TO AVOID GLOBAL DEPRESSION. LOOSE MONETARY POLICY MEANT HUGE AMOUNTS OF CASH STARTED LOOKING FOR INFLATION HEDGES.

14 Cotton Valued in Gold 1975 to Present Ounces / Bale Updated 04/12/2011

15 Cotton Valued in Crude Oil 1983 to Present Barrels / Bale Updated 04/12/2011

16 Cotton Valued in DJIA 1975 to Present Index / Bale Updated 04/12/2011

17 NEARBY COTTON VS. THE DOLLAR INDEX GOING BACK OVER 25 YEARS, THE CHART OF COTTON VS THE DOLLAR INDEX SHOWS AN ALMOST PERFECT MIRROR IMAGE, OR INVERSE RELATIONSHIP. HOWEVER, IN 2010, THERE WAS DIVERGENCE IN THIS PATTERN DUE TO THE SPEED OF COTTONS ADVANCE.

18 Dollar vs. Cotton DollarCotton Log Scale Updated 04/12/2011

19 FIRST, A QUICK LOOK BACK HERE ARE THE ESTIMATES FOR THE 2009 / 2010 CROP YEAR WE PRESENTED AT A BANKERS MEETING IN APRIL, KEEP THESE NUMBERS IN MIND WHEN WE GET TO THE 2010/2011 CROP ESTIMATES.

20 USDA FEBRUARY ESTIMATES – WORLD SUPPLY & DEMAND 09/10 Beg StocksProdUseUnkn. End Stocks to Use MAR (2.46) % APR (2.51) % Change 0.33(0.52)0.37(0.05)(0.50)(0.6%) Updated 04/13/2011

21 USDA APRIL ESTIMATES – WORLD SUPPLY & DEMAND 10/11 Beg StocksProdUseUnkn. End Stocks to Use OCT (2.06) % APR (0.15) % Change(2.50)(2.15)(3.65)1.91(3.11)(1.5%) Updated 04/13/2011

22 HOW TIGHT IS THE U.S. SITUATION? THOUGH I.C.E. FUTURES ARE UNDOUBTEDLY INFLUENCED BY WORLD PROSPECTS, THE ONLY COTTON THAT CAN BE TENDERED AGAINST FUTURES IS U.S. COTTON, AND ONLY CERTAIN GRADES ARE ELIGIBLE. SO U.S. CONDITIONS RULE, AND U.S. FUTURES CAN DIVERGE FROM WORLD PHYSICAL PRICES FOR THIS REASON.

23 USDA APRIL ESTIMATES – U.S. SUPPLY & DEMAND 10/11 Beg StocksProdUseExport End Stocks to Use OCT % APR % Change -(0.77) (1.10)(5.9%) Updated 04/13/2011

24 COTTON MAY BE EVEN TIGHTER THAN IT LOOKS BEGINNING STOCKS MAY BE OVERSTATED. EXPORTS HAVE ALREADY EXCEEDED ESTIMATES. THE OLD CROP IS OVERSOLD THE NEW CROP IS NOT OFF TO A GOOD START. THE BIGGEST GROWING AREA IS IN TERRIBLE DROUGHT.

25 U.S. Exports Sales & Shipments as of April 7, 2011 Updated 04/14/ TOTAL SHIPPEDTOTAL UNSHIPPEDTOTAL COMMITMENT All Other1,585,625713,6462,299,271 Pakistan306,875173,438480,313 Korea300,208254,167554,375 Brazil457,396181,458638,854 Bangladesh300,104372,813672,917 Thailand540,417180,208720,625 Viet Nam513,854216,771730,625 Indonesia639,688311,250950,938 Mexico857,188561,7711,418,958 Turkey1,506,354680,5212,186,875 China3,482,5001,816,3545,298,854 TOTAL10,490,2085,462,39515,952,604

26 CURRENT SUPPLY / DEMAND OUTLOOK WORLD PRODUCTION WILL BE LESS THAN CONSUMPTION AGAIN THIS SEASON. WORLD CARRYOVER WILL BE DRAWN DOWN TO LOWEST LEVEL SINCE WORRIES ABOUT WESTERN ECONOMIES HAVE LED TO DRASTIC INVENTORY DRAWDOWNS THAT LEFT THE PIPELINE EMPTY.

27 CURRENT SUPPLY / DEMAND OUTLOOK PRODUCERS AROUND THE WORLD WILL INDEED RESPOND TO PRICE SIGNALS. PRODUCTION SHOULD OUSTRIP CONSUMPTION IN 2011/2012. BUT FIRST WE HAVE TO PLANT THE CROP, PRODUCE IT, HARVEST IT, AND GET IT INTO THE PIPELINE. THAT WILL TAKE UNTIL EARLY 2012.

28 COMPARISON OF ESTIMATES MY 2010/11 PCCAUSDACotlookICAC World Production113,951114,533111,773113,215 Consumption115,610117,124114,299114,134 Balance(1,659)(2,590)(2,526)(919) Updated 04/13/2011

29 COMPARISON OF ESTIMATES MY 2011/12 PCCAUSDACotlookICAC World Production127,081127,500126,833126,075 Consumption120,864120,000121,303117,532 Balance6,2167,5005,5308,543 Updated 04/13/2011

30 COMPLICATING FACTORS CROP INSURANCE PRICE IS $1.23. CHINESE GOVT (CHINA NATL COTTON RESERVE CORP) HAS ESTABLISHED A PURCHASE PRICE OF $1.37 FROM SEPT 2011-MARCH THIS MAY ESTABLISH A FLOOR FOR WORLD COTTON PRICES AT ABOUT $1.20 CIF CHINESE PORTS. THAT MEANS $1.04 FOB INTERIOR WAREHOUSE IN THE U.S., OR ABOUT $1.10 TO $1.14 FOR THE FUTURES MARKET. U.S. FARMERS WILL WANT TO DEFER INCOME UNTIL 2012, GIVING THEM AN INCENTIVE TO HOLD COTTON INTO NEXT YEAR.

31 CHINESE STRATEGIC STOCKS CNCRC STOCKS MAY 2009:4,000 MM MT SOLD MAY – DEC 2009:2,642 MM MT SOLD AUG-OCT 2010:1,000 MM MT BALANCE NOV 2010:0.358 MM MT THIS EQUALS ONLY ABOUT 1.6 MILLION BALES, OR 13 DAYS CONSUMPTION IN CHINA. Updated 02/19/2011

32 OTHER SUPPORTIVE FACTORS DOLLAR WEAKNESS IS POSITIVE FOR COTTON PRICES. THE ON-CALL POSITION IS HISTORICALLY VERY LARGE, AND VERY SKEWED TOWARD ON-CALL SALES WHICH REQUIRE FUTURES TO BE BOUGHT. WORRIES ABOUT INFLATION HAVE MANY FUNDS LOOKING AT COMMODITIES AS AN INFLATION HEDGE, SO THEYLL BUY AND HOLD. CURRENT GEOPOLITICAL UNREST AND FAILURE TO HANDLE DEFICITS FUEL THAT DESIRE.

33 LONG-TERM SUPPORT LONG-TERM GROWTH IN FIBER DEMAND WILL OUTSTRIP GROWTH IN FIBER SUPPLY, ACCORDING TO CCIS EXPORT PROMOTION COMMITTEE. –DEMOGRAPHICS POINT TO SIGNIFICANT POPULATION GROWTH. –SYNTHETIC FIBER PRODUCTION TAKES TIME TO BUILD. –LONG-TERM TRENDS IN THE RAW MATERIALS FOR SYNTHETIC FIBER POINT HIGHER. –COTTON ACREAGE IS REACHING A PLATEAU, AND GROWTH IN SUPPLY WILL HAVE TO COME FROM GROWTH IN YIELDS. THUS PRICES OF ALL FIBERS SHOULD TREND UPWARDS AS EXCESS CAPACITY IS ABSORBED. CONSUMERS CONTINUE TO SHOW STRONG PREFERENCE F0R COTTON, ESPECIALLY AS INCOMES INCREASE.

34 MORE SUPPORTIVE FACTORS DEMAND FOR COTTON IS STRONG OUTSIDE THE U.S. AND EUROPE. –OTHER COUNTRIES ARENT AS INDEBTED AS WE ARE. –POPULATION GROWTH CREATES ITS OWN DEMAND. –INCOME GROWTH CONTINUES IN ASIA, AND FIBER CONSUMPTION SHOULD BENEFIT. GLOBAL CONSUMERS ARE BEGINNING TO ACCEPT PRICE INCREASES ON A BROAD RANGE OF APPAREL PRODUCTS. THE GLOBAL SUPPLY CHAIN SEEMS TO BE ABLE TO ABSORB COTTON PRICED AS HIGH AS $1.80 BEFORE DEMAND DESTRUCTION OCCURS.

35 POTENTIAL PITFALLS FOR PRICES POTENTIAL PITFALLS FOR PRICES ECONOMIC CONFIDENCE IS VERY FRAGILE, AND THE CONSUMER COULD EASILY GO BACK IN HIS SHELL. THREAT OF RISING OIL AND FOOD PRICES COULD PINCH OFF CONSUMER SPENDING. EMPLOYMENT GROWTH HAS NOT BEEN SIGNIFICANT, AND FISCAL RESTRAINT WILL SLOW DOWN THE AMOUNT AND VELOCITY OF MONEY. SYNTHETIC FIBER PRICES ARE WELL BELOW COTTON, AND FIBER SUBSTITUTION IS OCCURRING. COTTON SUPPLIES SHOULD REBOUND IN 2011/2012.

36 CONCLUSION COTTON PRICES ARE PROBABLY GOING TO FIND A NEW MEDIUM-TERM EQUILIBRIUM LEVEL THAT WILL BE A GOOD BIT HIGHER THAN THE 60-CENT RANGE OF THE PERIOD. OUR BEST GUESS FOR CURRENT CROP IS $ $2.25. FOR NEW CROP ITS $ $1.50, DEPENDING ON WEATHER. IT WILL TAKE WELL INTO Q FOR PRESSURE TO BE OFF OF SUPPLIES AND PRICES.


Download ppt "MAKING SENSE OF COTTONS METEORIC RISE 2010/2011 Wally Darneille April 27, 2011."

Similar presentations


Ads by Google