Planting for the 2015 Australian crop is 95% completed. Many of you already may know, severe draught has limited the number of acreage to half of previous years. We are expecting approx. 1.7m bales in 2015 (3.8m bales in 2014). There is no option to increase the planting areas anymore. On the positive side, during the draught years the quality of Australian cotton is of the highest grade. About 40-50% of the 2015 crop has been committed to the merchants.
The basis for Australian cotton is expected to be quite high due to a number of factors including; a much smaller crop, expected higher grade, tougher competition and lower future price. We have been advised that merchants are paying growers 1400-1600pts on May'15 to secure the cotton.
China will continue to have a major impact on the basis of Australian cotton. The import quota needs to be fulfilled by December 2014 ( except .89m/mt WTO quota can be extended till February if the Government decides to), only mills who re-exports finished goods will be allowed to import foreign cotton after December. If China doesn’t come into the market and purchase Australian cotton as predicted, we might see the basis softening slightly. The Chinese government announced a subsidy to inland farmers of 2000yuan/mt, which prompted the farmers selling aggressively and pushing the domestic physical price lower. Chinese imports of US cotton is the lowest in the last 5 years. On the yarn side, imported Indian yarn and Chinese yarn has a price gap of only 1000rmb/mt for 32s carded. As a result the demand for Indian yarn from China will decrease and a likelihood more Indian yarn will come into the Bangladeshi market?
A large world stock of 107.36m bales, favourable weather condition in the US and less physical demand from the mills are all keeping the market into a bearish sentiment. The lack of open interests on the future shows all parties are cautious with their positions. US exports are slower, this could be due to a lack of demand from the mills or a lack of deliverable cotton. This is open to speculation. In my opinion, the market is digesting all the bearish sentiments and still holding on to the .60 range mark, therefore I would not be surprised to see some sudden rally.