ICE Cotton Futures
Prices have been unable to hold on to last week’s gains and closed below what looks like a bearish consolidation pattern. Volume has increased as Dec-Mar spreading activity has become more intense. About half of this week’s futures volume has been spread related. The Dec15-Mar16 spread has been under pressure from fund rolling and moved from premium to discount for the first time since August.
The short-term technical picture has turned negative from neutral. Support is at around 62.00 then at 61.60. Building value below latter level sets 60.50 as minimum down-side target. Resistance is at 62.40, 62.80-63.00. Key resistance is between 63.60 and 64.00. If broken on a close basis then would expect a push to 65.00-65.50.
The new ICE world cotton contract (WCT) debuted on Monday. The exchange has been actively looking for support from all relevant sectors in order to ensure a successful start. However, so far only very little volume has exchanged hands (250 lots in total). This is not entirely surprising as understandably participants are hesitant in committing themselves in an illiquid contract and one that lacks established reference points. Nevertheless, the potential for this contract to become important exists. It may just need some time.
USA – The USDA weekly indicators show that cotton boll opening and cotton harvest continue to track closely with the five year average. In terms of subjective crop condition ratings, the latest weekly report showed 47% of the U.S. crop in the “Good/Excellent” categories, same as the previous week. Roughly 50% of the U.S. crop has now been harvested. The Southeast witnessed a few more days of untimely rains, and weather in West Texas. Central has been genuinely conducive to the continuation of the harvest. Recently, we hear reports of perhaps greater than expected cotton yields from the High Plains region of the state with larger than expected boll sizes. This might ultimately translate into an upward revision to Texas production by one or two hundred thousand bales. If that were to happen, it might offset some of the forthcoming production losses from places like South Carolina and North Carolina. In other words, overall U.S. production might not change much from the current projection. Next week’s USDA report should be one which gets closer to the final story. Because of the rains in most regions, the supply and demand of good quality cotton is another story. Market-wise, prices once again seem to be meandering in the muck and mire and going nowhere. The recent rally to near the 65-cent area fizzled out, and prices have since retreated back near the “old support” area of roughly 62 cents. Much of the crop in the U.S. remains to be sold by producers and the market price remains mostly uninteresting for producers. The season is still young and we expect the bulk of movement through the marketing channels to commence towards the latter part of this year. In the meantime the local basis and fiber quality premiums remain strong. U.S. fiber quality has consistently traded at a premium, especially for the last two crop seasons. This is expected to continue, but with overall demand weak and serious price competition from other growths, how long this will last can be questioned.
India – According to the latest preliminary estimates by Cotton Advisory Board (CAB), the opening stocks of cotton in India for 2015-16 seasons (October-September) is estimated at 5.2 million bales, cotton production forecast at 36.5 million bales and imports to be around 1.2 million bales. On the demand side, consumption by textile mills is expected to be 32.3 million bales and exports may rise to 6.8 million bales, up 17.1 percent on y-o-y basis which would led to a closing stocks at 3.8 million bales versus 5.2 million bales last year. With clear weather over the plains, harvest further advances over key cotton producing regions. Arrivals have reach approximately 133’500 bales (each 170 kg) per day. Rising cotton supplies in the major cash markets and subdued demand from mills will keep the sentiments slightly weak for short term. Exports business continued into Pakistan, Bangladesh & Far East markets, with price range USC 65-66 per LB CFR for 29-30 mm G5 quality.
China – After having cleared the 12’100 resistance, the market entered into consolidation mode (basis Jan16). Prices have been trading sideways within a 130 pts range to close virtually unchanged. A settlement below 12’000 would mean that the short-term corrective move is over and the market is ready to test the life of contract low at 11’800. Overall trend remains down.
The Shanghai stock index is up and crossed the 3’500 mark after the Central Bank reduced banks’ reserve requirements increasing the liquidity.
Most mills have changed from import origins to Xinjiang cotton due to limited quota availabilities. Demand for consignments has dropped this week. First Brazil new crop consignments are arriving. It is expected that also consignments from India will increase starting second half November. Mills generally complain about slow business and lack of cash flow.