[Plexus Cotton] Cotton market report (Mar 28, 2013)

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NY futures moved sideways this week, as May added 26 points to close at 88.46 cents, while December gave up 45 points to close at 87.37 cents.

The main feature this week was the USDA Prospective Plantings report, which was released earlier today. According to the USDA, cotton is the big loser in the fight for acreage, as farmers are expected to commit just 10.0 million acres to cotton this spring, which would be 2.3 million acres or nearly 19% less than what was actually planted a year ago. Traders seemed to see the number as neutral to mildly bullish, although they certainly realize that this is still very much a moving target at this point.

Planting intentions for corn and soybeans are nearly identical to what was planted last season, with corn at 97.3 million acres (+0.1 million) and soybeans at 77.1 million acres (-0.1 million). The big winners in the plantings sweepstakes are wheat at 56.4 million acres (+0.7 million) and sorghum at 7.6 million acres (+1.4 million). It looks like wheat and sorghum are stealing acreage from corn and soybeans in certain parts of the country, whereas corn and soybeans in turn are taking it away from cotton in other areas.

There are still a variety of factors that may alter planting decisions over the next couple of months. Price is the obvious one and cotton continued to make up ground against its closest competitors corn and soybeans, as they got hammered today in the wake of bearish stock reports. November soybeans ended today’s session at 12.51 dollars/bushel, down nearly 27 cents, while December corn closed at 5.38 dollars/bushel, down over 32 cents.

Interestingly, when we take a look at where cotton, corn, soybeans and were trading a year ago, we notice that cotton and corn were almost at identical levels to where they are today, whereas soybeans were trading substantially higher. On March 28 last year, December cotton closed at 90.69 cents/lb (vs. 87.37 today), December corn was at 5.36 dollars/bushel (vs. 5.38 today) and November soybeans closed at 13.20 dollars/bushel (vs. 12.51 today).

Based on the above price structure, cotton farmers intended to plant 13.2 million acres a year ago, or 3.2 million acres more than what the USDA is currently projecting! Since cotton has about the same price ratio to corn as last season and is much better off compared to soybeans, such a huge drop in acreage doesn’t seem to make sense. We therefore believe that the last word in regards to cotton acreage is not spoken yet and that some farmers may have a change of heart over the coming weeks.

US cotton continued to be in good demand last week, as another 254’800 running bales of Upland and Pima cotton were sold for both marketing years combined. Shipments were once again excellent at 360’500 running bales. For the current season we now have total commitments at 11.8 million statistical bales, of which 8.1 million have already been exported. Commitments for August onwards amount to 1.3 million statistical bales, which is 0.4 million bales ahead of last season.

Open interest in ICE futures did not change much this week, as the total is still at 209’254 contracts, down just 949 lots over the last five sessions. May and July futures still have a combined 168’292 contracts open, which is quite a bit considering that there isn’t a whole lot of cotton left for sale outside China. These 16.8 million bales in current crop open interest compare to 13.5 million bales last season and 11.5 million bales two years ago.

Based on the CFTC report as of March 19, which includes futures and options, the trade held at net short position of 16.8 million bales (5.1 million long vs. 21.9 million short), whereas speculators were 9.7 million bales net long. Index funds, which are driven by money flows rather than market moves, owned the remaining 7.1 million bales in net longs.

So where do we go from here? After trading down to a low of 86.12 cents earlier this week, the market encountered decent underlying support from mill fixations (May on-call sales were down 1’841 contracts net) and new cash business, as US prices moved back in line with foreign growths. As long as mills are able and willing to pay prices in the mid-90s for high grades, landed Far East, and as long as the trade carries this massive net short position, we see it difficult for the market to sell off by more than a few cents.

There are twelve weeks remaining until July futures head into the notice period and the market’s direction during that time frame will to a large degree depend on how this big open interest in current crop futures is dealt with. Who will blink first, spec longs or trade shorts? The longs are in a more comfortable position, because they are sitting on a profitable long, which they will continue to ride until the trend reverses. Also, the inversion between July and Dec is working in the specs favor, since they are able to pick up roll gains in case they decided to hang on to their longs.

The trade shorts on the other hand are in a less comfortable spot. Not only is their position nearly twice as big as the spec long – the difference being the index fund long which will simply get rolled forward – but most of these trade shorts form part of basis-long positions (long physicals/short futures) that have not been working too well basis-wise. The widening inversion between July and December creates some worries in that regard, as it doesn’t make sense to hang on to a physical long position in a market with negative carry. We therefore believe that traders will start to push physical sales, which in turn requires the buying back of futures. In other words, the more the trade sells on the physical front, the more futures will get bought back, which puts additional pressure on the basis and keeps the futures market well supported. There doesn’t seem to be an easy way out from this trap, unless the specs were for some reason (macroeconomic event) to decide to cash in their longs.

We therefore see continued support in May and July, with the potential for short-covering rallies, while December should start to stall out as grower hedging becomes more widespread.

Source: Plexus Cotton

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