Reinhart – Weekly Cotton Market Report: July 28, 2016

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ICE Cotton Futures

Cotton spent all week in consolidation mode, trading in a range of roughly 71.00-75.00 c/lb (basis Dec16). Volumes are decent at around 20’000 lots per day. While trading continues range bound, option’s implied volatility came off about 5 % from recent highs. It remains important to note though that the main trend remains up and a next challenge of the upper end of the range at 75.00 c/lb seems likely. Should prices be pushed above this level, volatility is likely to increase sharply.

The CFTC COT report showed again large increases of the managed money long position. The spec community is currently charged with the largest net long position since May 2014, while the commercial sector owns the largest short position since January 2011.

Physical business remains decent in various market, particularly in South Asia.

Technical picture: short-term trend neutral, main trend up; support at 71.75-71.00, 68.00 (key1), 67.00-66.50 (key2). Resistance at 75.00.

USA

Typical for summer months, all eyes are now focused on the weather in the U.S. Unfortunately in West Texas we have seen a pattern shift from an abundance of rain early in the season to abnormally hot dry conditions now prevailing in the region. With ten record highs being broken in Lubbock so far this month, the current pattern is taking its toll on the crop. According to the latest crop condition report released by the USDA Texas is going backwards with 17% now rated poor to very poor condition. General rains are badly needed otherwise abandonment numbers will soon increase in the area. The excellent weather occurring elsewhere in the U.S. may not be enough to offset the potential loses in Texas.

India

Cotton imports during (Oct-June) 2015/16 were about 790’000 bales (each bale 170 kg), market participants expect the total imports could go up to 1.8 million bales by end of season. The Indian ministry of agriculture figures predicts that all India cotton sowing had reached 8.7 million hectares by now, down about 12% as compared to same period a year ago. As per private weather forecasts, a cyclonic circulation is prevailing over West Madhya Pradesh and adjoining East Rajasthan. This weather system will eventually enhance the rain activities over Gujarat and rains will potentially intensify by first week of August. MCX (basis Oct16) is consolidating with the RSI in neutral region. The market is moving in a range of 21’350-23’120 for the past few days. The next area of resistance level is pegged at 23’080-23’120 while we see support between 21’400 and 21’440.

China

During the reporting week prices have been in a sideways consolidation near the 15’000 short-term support (basis Jan17 contract), but managed to break below in the last session. If the break is confirmed, then the 14’200 key support becomes the next downside target. Building value below cancels the short-term positive outlook.

With prices consolidating in a volatile and nervous market, demand for Reserve cotton continued at healthy levels. All offered quantities are usually sold. At the current pace, the goal of 2’000’000 ts total Reserve sales will be reached before the end of August, when the auctions are scheduled to stop. Many market observers believe that the auctions will continue even after the 2’000’000 ts are reached, and may possibly go on also in September until new crop becomes available; but for now those are only rumors.

Import activities continue rather slowly as current higher flat price levels still need to be digested.

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