ICE Cotton Futures
The market reached a (temporary?) top on Friday near 75.00 but was thereafter running into divergent territory vs. stochastics. What followed was a somewhat expected and due consolidation of the recent, impulsive up move. The overall technical picture though remains unchanged with the main trend up. Any meaningful support still appears to be relatively far below current price levels.
The CFTC report (as per 12 July) showed a large increase in physical offtake/hedging of the commercial sector (+30’790 shorts). The commercial category has now the largest short position since mid-2013. Buyers were mainly the specs who added a total of 18’879 lots new longs. It is not their largest, but a relatively large net long position compared to previous years. Friday’s report will likely show a further increase of these positions.
Physical activity has clearly improved for the week with specifically South Asia showing good demand, with other markets catching up.
Technical picture: support at 71.00, then 68.00 (key1), 67.00-66.50 (key2. Resistance at 75.00. The main trend remains up.
The U.S. crop continues to move along so far without too much difficulty. The USDA Weekly Crop index gives a rating of 56 percent good to excellent, which is exactly unchanged from the previous week. West Texas, the area of the country with the most concentration of acres will soon need some additional moisture. If not the likelihood of the crop maintaining its current condition will be jeopardized. Marketing wise, last week’s surprising rally gave cotton producers their first real bona fide opportunity to make a marketing risk management decisions for the 2016 crop. A fair percentage of the crop was pre-sold as a result of the significant rise in I.C.E. futures as the July USDA monthly supply and demand numbers were an unexpected gift. Prices gapped higher, climbing to a two-year high and breaking out of a long-term 10 cent trading channel. Old crop supplies are also now virtually gone as a result of the market rally combined with an increase in nearby demand from spinners. CCC loan stocks are being reported at 454’354 bales, a reduction of almost 240’000 bales from the previous week. Certificated stocks remain about unchanged, currently at 126’000 bales.
Indian cotton prices traded lower tracking bearish cues from international market and increased selling by traders/stockists in the domestic market. The monsoon covered the entire country and was active in most parts of India during the first half of July which boosts kharif sowing and soil moisture. Overall, seasonal rainfall, since the start of June, has been 1 per cent above normal till 20th of July. However, western India (Gujarat) still facing lower rains, about 45 percent lower from long period average. Ministry of agriculture (India) reported that all India cotton sowing had reached to 7.541 million hectares as on 14th of July, down about 19.1 percent as compared to same period of the last year. Sowing is complete in Northern India (Punjab and Haryana) stood at 0.754 million hectares, down about 26 percent on y-o-y. Cotton 29 mm at MCX (July contract) trading weak on w-o-w basis, daily oscillator RSI is in the neutral region and prices hovering above 20 day EMA which suggest that selling may be drying up soon and prices may consolidate in the near term. The next area of resistance level is sets at 22’150-22’200 while support at 21’400-21’450 levels.
On Monday at opening the market posted a new contract high at 16’185 (basis Jan17 contract). However, prices failed to build value above 16’000 and declined to test the short-term support at 15’000. The momentum indicators (RSI and Stochastics) continue to show a negative divergence to the underlying price action, which might signal that upside momentum has weakened. Building value below 13’800 would void the short-term bullish outlook.
Since the beginning of last week, offered quantities by the Reserve have been increased to about 30’000 tons daily. Even at this higher level, there is continued good demand and practically everything on offer is sold out day after day. That fact adds credibility to the last increase of consumption estimate by USDA. There are also first reports that not only yarn prices but also grey cloth prices are starting to increase. On the other hand, it appears that along the value chain there is some re-stocking going on, not only of cotton but also of yarn; so when the market turns down some day, demand could also be hit.
Import demand has slowed down at current higher international prices, but the market is gradually getting accustomed to the new prices. Demand tends to be for nearby positions, often from mills with offshore units in some Free Zone or in Vietnam.