ICE Cotton Futures
On Tuesday, the market managed to break higher from a small consolidation pattern and moved above last week’s high. The rally took place with good outright volume and rising open interest. Thereafter the activity turned quiet with prices unable to follow through in the direction of the recent mini‐break, at least so far.
The Dec16 contract open interest has been rapidly expanding. Since the beginning of the month it has increased by about 17’000 lots. It stands now at 80’031 lots, just marginally below the current open interest of the Jul16 contract. From now on new spec activity will mostly focus on the Dec16 contract.
Technical picture: the market is trading at a short‐term important resistance area which sits roughly between 63.00 and 63.50. Settling and building value 63.50 calls for a move to at least last month’s highs (near 65.00).
Support is at 62.50‐62.30, 61.90, 61.60 and key at 61.10‐60.50.
USA – April was a better month for cotton prices. So far, May has not been, however prices seem to be attempting somewhat of a recovery. Both old crop July futures and new crop December futures have bounced back to recover about half of the decline so far this month. Unfortunately, the recent two‐cent reduction in the AWP transportation cost adjustment makes any MLG two cents lower than what it otherwise would be. In the overall grand scheme of things, some or all of this can be made up if U.S. cotton prices gain in relation to the A‐Index and/or if basis improves.
Moving forward, factors impacting prices will include crop conditions and changes in U.S. and foreign production estimates, U.S. exports, the amount/pace of Chinese reserve sales, and world mill use. The 2016 U.S. crop is currently projected to be 14.8 million bales, except that his first estimate is always based on expected acres to be planted, average yields and acreage abandonment with an adjustment based on present moisture conditions in the Southwest. Actual plantings and growing conditions will adjust this as we progress through the season. With good demand for high quality cotton, the market could go higher if crop prospects decline. 2016 crop year U.S. exports are forecast at 10.5 million bales. This actually seems like a good level of exports, given reserve sales and a second year of reduced imports allowed by China. This forecast likely reflects larger available supply in 2016/17 and seems to suggest that exports to other countries will offset some of the reduction to China. In USDA’s May supply/demand report, a little bit of information may have gone unnoticed. The expected U.S. average price for the 2016 crop is projected to be 47 to 67 cents per pound. If we take the midpoint at 57, that would be roughly the same as for last year’s crop. It also tells us that there is a supply/demand scenario that could take us much lower than where this market is now, but likewise a scenario that could lead to better prices.
India ‐ Indian cotton prices featured extended gains during the week on diminishing arrivals and good demand for quality cotton by mills. Cotton planting is underway in the Northern India (Punjab, Haryana and Rajasthan) and it has been noticed that farmers have switch to pulses crops due to failure of cotton crop last year and better return in the pulses complex. Sowing in Gujarat, Maharashtra, and other part of India would commence with the arrival of monsoon.
On the weather front, private weather agency predict monsoon rains would be 109% (error margin of +/‐4%) of the long period average (LPA) of 887 mm for the four‐month period from June to September, which is overall beneficial for the Kharif crops. Indian cotton exports reached around 5.95 million bales between October and 16 May The 29 mm June contract at MCX featured significant gains on week to week basis. The RSI shows a divergence though on the daily chart. We expect a trading range of 17’700‐18’110 for the next week.
China – The ZCE market continued to test the 12’900 resistance (basis Sep16 contract). A confirmed break above sets 13’450 as the next upside target and would likely lead to a new contract high. On the other hand, building value below 12’000 calls for a test of the key support at 11’200.
Reserve selling tenders continue to attract excellent buying interest and are mostly 100 % subscribed. Total sales will surpass the 0.5 million tons mark today. Lately, the maximum daily quantity of about 30’000 tons was not offered mainly owning to some logistical issues. Recently the share of import cotton dropped and may soon be sold out. At the same time the share of non‐spinning participants increased to about 45 %. The demand for imported cotton under TRQ or processing quota slowed down somewhat, most likely influenced by the higher ICE levels.