NY futures moved slightly lower this week, as December gave up 37 points to close at 64.93 cents.
After December had traded to an 11-month high of 66.45 cents on June 8, trade selling temporarily regained control of the market and took it about 300 points lower over the following six sessions, as evidenced by a series of ‘black candles’ on the chart. However, just when it seemed that the bulls were done, the market unexpectedly jumped today on renewed speculative buying and a lack of trade selling in a heavy volume session of 38,000 contracts.
Today’s move was all the more impressive since the cotton market shrugged off a disappointing export sales report as well as big declines in other commodities, such as soybeans and crude oil, and marched to its own tune.
The latest CFTC report showed that as of June 7 speculators were 5.64 million bales net long, whereas the trade was 12.34 million bales net short. Index Funds accounted for the difference with a 6.70 million bales net long position. As pointed out last week, speculators still have plenty of room to grow their net long position by another 4-5 million bales before it reaches historically high levels, whereas the trade will probably continue to add additional shorts against the growing crops in the Northern Hemisphere.
This ‘money vs. cotton’ battle is likely to keep prices range bound as long as there are no major production setbacks. The trade is not likely to add shorts in the low 60s given the relatively tight stock situation outside China and the uncertainty regarding new crop, which opens the door for speculators to spike prices as we have seen today. However, we expect trade selling to reemerge on a scale up basis above 65 cents.
Last Friday’s USDA report contained no major surprises, as the 2016/17 ROW production surplus (= all countries except China) remained unchanged from the previous month at 4.58 million bales. The only big change occurred in the Chinese numbers, where the USDA lowered the crop for the current and next season by a combined 2.3 million bales. However, China still has plenty of cotton at its disposal with ending stocks projected at 54.7 million bales at the end of next season, which is enough to feed domestic mills for over 19 months.
The two major crops traders are currently focusing on are India and the US. There have been some reports talking about lower plantings in India as well as a later than normal start to the monsoon season. However, while India may be planting 7-8% less than last season, current expectations are that the monsoon will bring above average rainfall, which should ensure better yields than last season. It is therefore way too early to discount Indian production numbers!
As for the US, the USDA has used a 3-year average yield of 807 lbs to come up with its current estimate of 14.8 million bales, which is probably a good starting point. However, considering that this 3-year average has been brought down by this year’s disappointing yield of just 766 lbs (the lowest since 2003/04) and further taking into account the above average subsoil moisture across the cotton belt, it seems reasonable to assume that there is some upside potential in regards to yield this season.
For example, in the 10 seasons before the current one, the US averaged a yield of 826 lbs, which at 8.8 million harvested acres would produce a crop of 15.14 million bales. If we were to match the record yield of 891 lbs achieved in 2012/13, we would look at a potential crop of 16.34 million bales. It is still early in the game and a lot can and probably will happen on the weather front. For now the crop is up and running, with temperatures heating up into the 90-100F across the cotton belt by this weekend.
US export sales slowed last week as higher prices kept buyers at bay. Total net sales of Upland and Pima cotton amounted to just 118,700 running bales for both marketing years combined. There were still 18 markets buying and 22 destinations receiving shipments of 146,200 running bales. For the current season we now have commitments at 9.25 million statistical bales, of which 7.6 million bales have already been exported, leaving outstanding sales of 1.65 million bales.
So where do we go from here? With most commodities and equity markets losing ground today, the big bounce in cotton came as a bit of a surprise and we will have to see whether this was just a flash in the pan or something longer lasting.
From a technical perspective December is still in an uptrend dating back to February 29 and the uptrend line is currently running through around 62.50. As long as this support holds, speculators will stay in their longs and possibly add to them. As we progress forward, this uptrend line is forming narrowing triangles with the 66.50 cents resistance in December and major resistance on the continuation chart at 68.00 cents, dating back to September 2014.
Sooner or later these important support or resistance levels will be breached and trigger a strong reaction by the large spec contingent, which is currently accumulating longs.
From a fundamental point of view we have to contend with a fairly tight supply situation in the ROW for another four or five months, but as long as Northern Hemisphere crops develop well and promise to replenish the supply pipeline, traders will maintain a longer-term bearish outlook and add to their net short on rallies. For now the market is likely to stay range bound between 62.50 and 66.50, wedged between a friendly technical and a bearish fundamental scenario, but we need to watch out for potential game changers, such as adverse weather, chart triggers and macroeconomic developments.