Reinhart – Weekly Cotton Market Report: January 28, 2016

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 ICE Cotton Futures

End last week’s renewed attempt to close above the range in force since early January ended in disappointment as the market was unable to uncover sufficient buying power to cut through the thick selling which was resting at/near last week’s highs. As a result, prices turned impulsively lower and fell below range support to close at the lowest level this year so far.

Spreading volume has picked up. So far this week it averaged 14’000 lots/day vs. about 9’500 lots/day last week.

Technical picture: The settlement below range support (61.50-61.15) sets 60.50-60.00 as minimum short-term down-side target area. Resistance is at 61.50, 62.10, 62.40 and short-term key at 63.00. Settling above 63.00 gives 64.00- 64.50 as first up-side objective.

Commodities in general still have to deal with a bearish environment, both from a fundamental and technical perspective. However, some markets appear to have become quite mature in their (bearish) development as they seem to be trading the final leg of a complete down-cycle. This deserves to be watched as a behavioral change in outside market may well influence the cotton market.

India – Indian cotton prices are quoted lower at major trading centers tracking weak cues from international market. As per the Cotton Corporation of India, all India new crop arrivals are reported at 14.40 million bales (each bales 170 kg) in the current 2015-16 season (October-September) till 25th of January. Arrivals have picked up during the second half of January as compared to the initial days of the month and have reached about 150-160K bales (each bale 170 kg) on the daily basis. Sources revealed that India exported around 4.4 million bales (each bale 170 Kgs) of cotton during 1st of October, 2015 to 15th of January, 2016.

Indian rupee has weakened further and hit 29-month low (68.20 level), after the US Federal Reserve flagged off concerns over unsteady global markets. The MCX cotton futures (basis Feb16 contract) have traded lower by about 1.3 percent from last week after failing to break above 16’730-16’750 resistance area. Near-term support is now at 16’240-16’260.

China – After having bounced off the 11’100 support (basis May16 contract) the market entered into a consolidation. Prices have spent this week trading sideways near the 11’500 resistance within a 120 pts range. A close above 11’650 would change the short-term outlook to positive and set the next upside target at around 12’000.

The country is slowly entering holiday mood and several mills have already started shutting down. Quota has now been generally distributed which has led to some moderate import business but mainly centered on nearby deliveries. The domestic market is showing a strong inverse. Due to generally bad business conditions and a general conviction that the reserve will ultimately dispose of stocks, there is some general bearishness in the market. On the other hand nobody knows what the reserve will do and what their initial selling policies will be; and offering prices for physical cotton from current crop remain at huge premium over ZCE futures. The CCI Index for spot cotton at 12’389 is the equivalent of about 74 c/lb which makes imports still viable for such clients who have quota available. ZCE futures at 11’405 for May reflect 68 c/lb which is already hard for imports. September futures at an equivalent of about 65 c/lb are even worse. So it must be feared that import demand will continue to slow down as the season progresses.

According to first indications from local government sources it appears that planted acreage in XJ may again be reduced by about 5% compared to last season. On the other hand, the extremely bad weather conditions of last summer are not likely to be repeated, so yields are expected to revert to the long-term average. That would mean a XJ crop roughly unchanged from last season around 3.6m ts. Production in Eastern China is likely to fall further due to unattractive prices and little or no subsidies to farmers. So the total crop is likely to turn out somewhat smaller than last year.

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