Reinhart – Weekly Cotton Market Report: May 12, 2016

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ICE Cotton Futures

This week’s USDA supply and demand update shows higher 2016/17 world production by 1.05 million metric tons (m mt) vs. 2015/16, higher consumption (up 0.38 m mt) and lower ending stocks (down 1.38 m mt).

Ending stocks in China are expected to decrease by almost 1.50 m mt hence limiting imports to about the WTO quota size. Its stocks-to-use ratio is expected to decline to 169% from 195%. Without major market disruptions it will take several years to bring China’s stocks-to-use ratio closer to historical normal levels, i.e. in the 50 to 70% range. The World-less-China stocks-to-use ratio for 2016/17 is estimated at 51.4% which is practically at the same level as for 2015/16.

The recent futures market action has been negative, but prices have managed to hold above the short-term key support area which sits around the 60.00 level. The ability to hold here should prompt a rebound to (at least) 62.00-62.50. Settling below 60.00 calls for a move to about 59.00-58.50.

In the short-term there are probably no strong reasons why prices should experience a major and lasting volatility outburst and therefore price action should remain confined within established ranges.

USA – With this month’s release of the WASDE report, USDA gives an updated glimpse of the coming season’s supply/demand outlook. A projected 2016/17 U.S. cotton crop of 14.8 million bales is expected to boost next season’s ending stocks well above the beginning level. Production is anticipated to rise 15 percent from 2015/16, based on 9.6 million planted, and combined with below-average abandonment, due to relatively favorable moisture, and average yields. Domestic mill use is projected stable at 3.6 million bales, while exports are expected to rise to 10.5 million, on higher available supplies and more marketable qualities. Ending stocks are projected at 4.7 million bales, or one-third of total use. These forecasts will be updated and subject to revisions as the growing season progresses. As far as sowings go, 26% of the crop has been sown, about on par with the 5 year average. We hear of real concerns at this early stage, except that it is reported to be rather dry in the West Texas Plains region. CCC loan stocks are currently 1.13 million bales with approximately 16’000 bales being redeemed within the last week.

India – Indian cotton prices traded stable during the week despite of losses at ICE mainly attributed to restricted sales and weak arrivals in the domestic market. As per the latest USDA’s May WASDE report for 2015-16 (Aug-July) season, USDA increased its Indian cotton imports forecast to 0.85 million bales (480-lb) versus 0.8 million bales last month estimates. The projected balance sheet drawn by the USDA estimated total cotton supply for the season 2015-16 at 41.14 million bales while the demand (including export) is estimated at 30.25 million bales thus leaving an available surplus of 10.89 million bales. For next season, USDA projected higher cotton production for India which is estimated at 28 million bales vs 26.8 million bales for the 2015-16 season. Cotton 29 mm at MCX (May contract) couldn’t sustain at 17’870 level (contract high). RSI oscillator is near to neutral region and prices may consolidate in the near term. Immediate key resistance level is sets at 17’500-17’550 levels and support at 17’035-17’080 levels.

China – On Monday the ZCE cotton futures broke out of the consolidation pattern to test the 12’000 support (basis Sep16) and partially closed the gap of 19th of April (11’775-12’020). However, a failure to build value below 12’000 prompted a corrective rally towards the key resistance at 12’900. A confirmed break above calls for a test of the contract high at 13’450.

The reserve auctions met a lot of interest and sold daily close to 30’000 tons and have by now surpassed the 200’000 tons mark whereof 70 % is foreign cotton. At the same time also interest for imported cotton has come back and there have been a number of sales; as usual US, West African, Brazil and Australian cotton are the main origins of interest.

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