NY futures continued to push higher this week, as May gained 161 points to close at 60.64 cents.
Just when it looked like the market was about to run out of steam, it suddenly started to accelerate to the upside last Friday and took out several resistance levels on its way to a high of 62.37 cents this week, before giving back some of its gains over the last couple of sessions. Since posting a spike low of 54.53 cents on February 29, the market has so far clawed back over 600 points and we believe that it isn’t done yet, although it may first have to regroup over the next week or two.
The large contingent of spec shorts got lucky that this move happened during the highly liquid index fund roll period, since it allowed many of them to roll their positions to July rather than being caught short in a thinly traded market. Overall open interest dropped only about 15,000 contracts during this run up and remains relatively high at 208,000 contracts, which tells us that only a small number of shorts actually got out this week, while most of them decided to buy some additional time by rolling down the calendar.
The USDA supply/demand report of April 12 showed that this price recovery isn’t just a fluke, but has some fundamental reasons behind it. The USDA lowered global beginning stocks (-0.29 million bales) and production (-0.42 million bales) while raising mill use (+0.38 million bales), which combined with some minor adjustments in the imports, exports and loss columns resulted in a drop in global ending stocks of 1.12 million to 101.2 million bales. Endings stocks have now dropped 9.66 million bales since the beginning of the season.
More importantly, ROW ending stocks dropped to 38.2 million bales, which is 0.62 million bales less than in the March report and 5.76 million bales less than at the start of the season. ROW ending stocks will be at their lowest level in six years by the end of July!
US export sales for the week ending April 7th were about as expected at 118,900 running bales of Upland and Pima for both marketing years combined. Participation was once again active with 19 markets buying and 24 destinations receiving shipment of 196,200 running bales. For the current season we now have total commitments at 8.2 million bales statistical bales, of which 5.5 million bales have so far been exported and 2.7 million bales remain open.
The USDA seems to have pulled a fast one on US growers and merchants this afternoon, since it has changed the AWP calculation without prior warning. In its weekly AWP release the USDA states “A new Far East transportation cost estimate of 14.53 cents per pound changes today’s average cost to market differential”, which means that the new AWP is not going to be 47.43 cents as anticipated, but 49.45 cents, reflecting this 2.02 cents lower transportation component.
Needless to say that merchants and growers are scrambling to get as much of the 2.6 million bales that remain in the loan out before the AWP jumps from 45.74 to 49.45 cents at midnight. We are not quite sure what impact this rush to redeem cotton from the loan will have on the futures market. On the one hand the base price for US cotton just got 200 points more expensive, but since growers and merchants usually sell futures against loan redemptions, we may see some pressure on May and July over the coming sessions.
Given the lack of carry in the market these newly established basis-long positions would likely be sold rather quickly though, which might put pressure on the basis of certain qualities. But as merchants unwind these basis-longs over the next couple of months, futures will have to be bought back. This, combined with the fact that speculators still have a substantial amount of shorts to cover, would add up to a lot of support for July going forward.
So where do we go from here? Fundamentally, technically and structurally the market looks well supported to us going forward, although for reasons explained above we may see some pressure on prices over the coming sessions. However, we intend to buy July on a pullback toward 58-59 cents, preferably via bullish options strategies.