ICE Cotton Futures
The market has continued to slide lower following last week’s failure to confirm the break above the near-term important 64.00-64.50 resistance area. Despite the overall weakness, the Mar16-May16 spread has traded somewhat firmer. This appears to be mainly linked to support coming from good nearby demand, mill fixations and some keen interest by commercials to roll Mar16 hedge shorts to May16.
Per Dec 29th specs were still holding a quite large net long position of 51’307 lots (basis the CFTC disaggregated commitments of traders’ report, futures and options combined). In the meantime, and considering the negative price development since the last report, some long liquidation must have occurred. However, this Friday’s report may show only a moderate decline of their long position.
The annual index fund rebalancing process, which starts this week, will force long contracts out of cotton and into commodities which underperformed in 2015. This may put further pressure on prices.
Short-term technical picture: prices have almost reached the projected down-side target basis the break below 63.00. A period of consolidative trading activity may start to unfold. Support is at 61.50-61.00. If broken on a close basis, 60.00-59.50 becomes down-side target. Resistance is at 62.70-63.00, 63.25 and key at 63.70. Building value above 63.70 signals a move to (minimum) 64.70-65.30.
USA – Physical trading has been light following the New Year holiday. The popular E-Trading platform in the U.S. reports that less than 15’000 bales have traded this week via their system. This is in stark contrast to the week prior where reported trades were more than 75’000 bales. Basis levels remain strong in some regions due to the shortage of white grades, specifically high grades. As it turns out, the 2015/16 crop will be one of the most diverse, quality wise in quite some years. On the same trading platform nearly 300’000 bales are currently offered for sale. Most lots are offered or priced way above the going market price. ICE reports that 64’292 certified bales were in delivery warehouses on January 6th, with no new certs at this time.
Moving on to the next season, while U.S. cotton producers won’t set any records for number of acres planted in 2016, it appears they do intend to increase their cotton acreage in 2016. The first polls which anticipate growers planting intentions for the 2016/17 crop are beginning to surface. The average estimate for one poll calls for a 13 percent increase for next season. While it does represent a higher total than what was planted in 2015, this projection would still represent the second smallest yearly acreage total dating back to 1983. As always, the price of cotton in the commodity markets remains the single most significant factor in driving acreage totals. Poor prices for competitive crops serve as the single biggest factor that may boost total cotton acreage, and cotton would appear to be a better option due to grain prices, insect problems in sorghum, and the potential for improved weed control in cotton. Another recurring theme, cotton yields in 2015 were overwhelmingly high. Texas will lead the way in 2016 acreage with a projected total, 5.216 million acres representing nearly 60% of total U.S. acreage. The state is poised to increase acreage by a higher percentage than any other. In the Mid-South, where growers historically have more diverse cropping options, price parity is set to be a big boost for cotton acreage. In the Southeast, where roughly of quarter of all U.S. cotton acres will likely be planted in 2016, cotton is very competitive and small increases can be expected.
India – The Cotton Association of India (CAI) has released its November estimate for Indian cotton crop 2015-16 season (October-September) whereby India total production is estimated at 36.2 million bales (each bale 170 kg). The total cotton supply is estimated at 45.4 million bales and consumption at 31.8 million bales thus leaving an available surplus of 13.6 million bales. Cotton arrivals are reported relatively lower on a daily basis compared to last year. As per the Cotton Corporation of India (CCI), all India new cotton arrivals are reported at 9.59 million bales till 28th December 2015. Indian rupee against US dollar traded around 66.70 on spot basis, lower by around 1.05 percent on weekly basis due to weak domestic equity market.
Import business was reported for West African S-Types 1.1/8 were around USC 69.50-71.00 per lb CFR for February/March shipment, mainly booked by South Indian mills. The daily chart of MCX cotton (Jan. 16 contract) depicts that prices couldn’t sustain at strong resistance level of 16’650-16’700. Near term support is now at 16’280-16’320 and resistance at 16’550-16’580 levels.
China – The most active May16 contract fell to a new contract low on the opening after New Year holidays. Once the next downside target at 11’100-11’000 had been reached prices entered into a consolidation for the rest of the reporting week. Long- and short-term trends are still negative with the next downside price objective at around 10’500 in case the market breaks below 11’000. The nearest resistance is at 11’500.
The textile industry continues suffering. As per Cottonchina, December PMI for the textile industry fell by 4.7 to 39.4%. Production, selling orders and capacity utilization are all down. Over the new year holidays, about 75% of all textile mills plan to close more than 7 days, about 30% more than 15 days. In the longer term, the continued devaluation of the RMB may bring some relief, but for now there is no evidence for that.
Nevertheless we have recently witnessed a bit more import demand mainly for nearby positions, in order to fill quota expiring by end February. But in view of domestic cotton prices approaching import parity, it must be expected that import demand this season will generally weak and may be turn out to be even less than most estimates.