New York, 26 May 2011

Morgan Stanley are raising their cotton price forecasts, to $1.43/lb in 2010/11 and $1.00/lb in 2011/12, and introducing a 2012/13 price forecast of $0.80/lb. These forecasts reflect their expectation that moderate near-term demand deferral and a large supply response this year will pressure prices in 11/12 and beyond.

"Record prices and a steep backwardation in the futures curve are finally starting to limit demand. Demand for US exports, which helped fuel the dramatic increase in price seen in late 2010 has started to weaken, as building yarn inventories in China are pressuring mill margins and lowering imports. While we expect the pace of US export cancellations to ease at current price levels, we have likely seen enough demand destruction/deferral in the near term to keep prices from returning to early 2011 levels. Our 11/12 price forecasts imply 19% of additional downside to the futures curve through the end of the marketing year," according to Morgan Stanley's Hussein Allidina.

Weather risks will also likely keep near-dated prices volatile; "We prefer to position for this story further back in the curve. As supply is set to rebound in 11/12, the cotton curve should move into contango. As such, we are initiating a short Mar 12 - long May 12 trade, currently trading in backwardation of $0.05/lb. Our target and stop loss are -$0.02/lb and $0.07/lb, respectively. We are also closing our long Dec. 11 trade, first recommended on Mar 1, 2010, at $1.31/lb," he added.

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