Reinhart – Weekly Cotton Market Report: Feb 18, 2016

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ICE Cotton Futures

Prices have managed to rebound from near contract lows in what looks like a due corrective action, at least for the time being. Better performing crude oil and equity markets have most likely contributed in keeping values somewhat higher. The latest CFTC Disaggregated Commitments of Traders Report (per Jan09, futures and options combined) shows that managed money funds (specs) have reduced longs by 6’493 and increased shorts by 17’750 lots. It is interesting to note that since mid-December there have been more shorts added (35’000 lots) than longs liquidated (25’000 lots). Currently, on a net basis specs are 599 lots long which is the smallest long position since end January of last year. While it is absolutely possible that specs will become net short, the history of the past four to five years shows that they do not like to stay short over a longer period of time. And if so, then with only a relatively small exposure. Based on this, one could expect spec selling pressure to become less intense in the coming days and weeks.
Technical picture: Short-term trend is negative but momentum is weakening. Nearest important resistance is at 60.50- 60.80 followed by 61.50-61.70. Settling and building value above 62.50-63.00 likely voids the negative picture

USA – Within the past two weeks ICE cotton futures have managed to stair-step to new contract lows. This continues a slide which started in early December when the March contract was trading in the mid 60’s. Now the new crop months have followed with December16 trading below 60.00, hardly a recipe for encouraging growers to increase plantings for next season. On the positive side, we see some rebound in U.S. export sales as spinners are taking advantage of lower prices. Unfortunately the U.S. cotton adjustments in February continued to reflect and predict weak demand fundamentals, and the revised carry-out implies a solidly neutral outcome for the expected year-over-year change in ending stocks and prices. In other words, the comparison of ending stocks is yet another fundamental reason for the ongoing range bound behavior of prices. The May-July futures spreads remains a fraction of that needed to cover the cost of storing cotton. This lack of sufficient carry in the market is contributing to mainly spot trading which should be a market signal for growers that it is probably not worth holding on to old crop cotton in hopes of higher prices. A caveat is that the cotton loan program provides a limited storage credit for cotton in the loan when prices are low enough, which they are. With weak demand fundamentals, there is little chance of sustained higher prices. There might be a chance for brief rallies if a low planted U.S. acreage encounters any weather difficulties. More specifically, if the current ample moisture gives way to normal hot and dry, or maybe supercharged La Nina hot and dry then there could be some summertime volatility.

India – Indian cotton prices have traded firm on slow selling by farmers and ginners. Lint prices for Shankar-6 1.1/8″ G5 28 g/tex are reported at around INR 33’500 per candy ex-gin equivalent to US Cents 63.35 per lb FOB based on prevailing exchange rate. The Ministry of Agriculture released its second advance Kharif (summer crop) cotton production estimate, which is pegged at 30.69 million bales (each bale of 170 Kg) for 2015-16 season (Oct-Sept), down by 4.11 million bales from last year. India rupee has plummeted to a 30-month low against US dollar and breached the level of 68.65/$1 on the back of weak global currencies and losses at domestic equity market. MCX futures for 29 mm cotton March contract have sharply recovered from the strong support at 16’210-16’230 level. OsciNators move in line with the prices and RSI is in the neutral zone. Near term resistance level is now at 16’720-16’750 and support at 16’310- 16’330 levels.

China – After the one week long Lunar New Year holidays business had a slow start. Influenced by weak outside markets ZCE came under pressure the first business day after the holidays but quickly recovered. Also the Shanghai Stock market rebounded. There is still no news regarding the start of reserve cotton selling which is now anxiously awaited by mills.

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