ICE Cotton Futures
On Monday the market made a faint attempt to challenge last week’s highs but it failed quite badly and consequently prices moved sharply lower to the former mini break-out area around the 64.00 level. Since then prices have been consolidating the losses within fairly narrow daily ranges. The corn and soybeans markets have also been engaged in a short-term negative trading pattern. Considering that prices in both markets are trading quite far from mid- and long-term moving averages, it seems obvious that they are in need to work off some of the short-term overbought trading conditions.
As per the last CFTC Disaggregated Commitments of Traders Report (futures and options combined), managed money funds further expanded their bullish bets in cotton. During the reporting period week ending June 7th, they increased longs by about 8’000 lots to 65’768 lots which is their largest long position this year so far. However, this week’s decline certainly kicked-out some of the more short-term oriented spec longs. Tomorrow’s report will tell us more.
Technical picture: despite this week’s decline, the trend remains positive albeit with overall weaker underlying momentum. Support is at 63.40-63.00 and key at 62.50-62.00. Breaking/settling below 62.00 likely cancels the bullish picture. Resistance is at 64.80, 65.20 and 65.60.
USA – The world 2015/16 cotton supply and demand picture was adjusted slightly USDA’s June WASDE report. The biggest and most notable change was a 1.3 million bales reduction in estimated Chinese production for 2015 season. In the U.S. cotton adjustments involved only a 50,000 bale month-over-month cut in estimated 2015/16 U.S. mill use. This went straight to the bottom line with estimated U.S. ending stocks rising to 4.1 million bales. The price implication of such a month-over-month adjustment in U.S. numbers can be viewed as basically neutral. U.S. planting progress is currently 89% sown, only 4% percentage points behind the five-year average pace. The two largest producing states, Texas and Georgia are at 84% and 94% respectively. A continued rainy pattern in Texas highlighted the trade-off between planting moisture and delayed planting early in the week. I.C.E. reports that 124’335 bales are now in delivery points with 1548 bales of new certificated stock. CCC loan stocks show little change from the previous week, currently at 746’598 bales.
India – Indian cotton prices traded firm despite of lower ICE, mainly attributed to limited selling in the cash market. As per the ministry of agriculture (India), Indian cotton sowing reached 0.987 million hectares till first week of June, down 0.49 million hectares as compared to the same period of the last year. The USDA released its latest WASDE report for 2015-16 (Aug-July) season in which it increased Indian cotton exports estimates to 5.90 million bales (480-lb), up 0.15 million bales from last month estimates. The projected balance sheet drawn by the USDA estimates total cotton supply for the season 2015-16 at 41.19 million bales while the demand (including export) is estimated at 30.15 million bales, thus leaving an available surplus of 11.04 million bales. For the new crop, the USDA reduced its India’s domestic consumption estimate to 24.25 million bales, similar to old crop year levels but increased its Indian cotton exports estimate to 4.0 million bales. During the week, some import business has been reported for West African cotton at 73.50-74.50 c/lb for July shipments, mainly booked by mills in Southern India. Cotton 29 mm at MCX (July contract) trading firm and RSI oscillator is in overbought region. Immediate key resistance level is at 19’940-19’970 and support at 19’430-19’460.
China – During the reporting week the ZCE cotton futures market has been in a sideways consolidation, about in the middle of a two month old trading range (12’200-13’400, basis Sep16). The short-term technical picture is neutral with the levels to watch at 12’000 on the downside and 13’500 on the upside.
Reserve sales are continuing, although at a somewhat slower pace mostly due to logistics constraints. Domestic cotton tendered for sale must be fully re-classed bale by bale, which is time consuming. Good demand continues for whatever is offered, and as per June 15th, total cumulative sales stood at 806’861 tons, comprising 510’732 tons of domestic and 296’129 tons of imported cotton. Import business continues subdued and mostly concentrated on nearby delivery. Apparently, mills in Free Trade Zones have also been allowed now to buy cotton at the reserve at the same condition as domestic mills; that will probably further increase demand for domestic cotton at the expense of imports.
The new crop seems to develop without major problems and under overall better conditions than last year; so in spite of lower acreage the crop is unlikely to fall by much, and the latest USDA estimates for 2016/17 appear realistic.