Market Comments – June 30, 2016

NY futures came under pressure this week, with December dropping 125 points to close at 64.17 cents.
 
The dichotomy between a bullish current crop situation and a potentially bearish new crop scenario has gotten even more pronounced this week, with the December contract wondering what lead it should follow.
 
Following the “Brexit” vote the market initially sold off to a low of 63.83 cents last Friday, but then quickly regained its strength as spec longs once again took control of the market. A lot of the buying came from Asian traders, after the Chinese futures market made another strong up move this week.
 
The January 2017 contract, which is the most actively traded in the Chinese futures market, has now surged 2,110 yuan/ton or 14.43 cents/lb since June 15, rallying from 12,655 to 14,765 yuan/ton, which amounts to around 101 cents/lb. Volume was extremely heavy, especially over the last few sessions, while open interest has more than doubled in the 12 sessions since June 15!
 
Last week we commented that there may be something amiss in the Chinese statistics, considering the pace with which mills and traders have been chasing available supplies, notably cotton offered through Reserve auctions. So far nearly 5 million bales have been taken up and according to local sources at least that much more is needed before new crop arrives. We don’t know whether the crop is overstated, mill use is understated or it is a combination of both, but there has to be a reason why the CC-Index is back at 90 cents and Chinese futures are trading at over a dollar a pound.
 
The US futures market has shown bullish tendencies as well and the fact that no cotton has been tendered against the expiring July contract is a sign of how tight the nearby supply situation has become. Not even at 65 cents were the owners of the certified stock, which currently amounts to 135,000 bales of mixed grades, willing to give it up. Most of this cotton will be shipped over the next few months, meaning that the certified stock will be next to nothing by the time new crop arrives.
 
US export sales continued to exceeded expectations, as 215,500 running bales of Upland and Pima cotton were sold for both marketing years combined, of which 71,200 bales were for prompt shipment. Once again we had broad participation with 18 markets buying and 22 destinations receiving shipments of 239,700 running bales.
 
Total commitments for the current marketing year have now risen to 9.5 million statistical bales, of which 8.0 million bales have already been exported. New crop sales have so far reached 1.9 million statistical bales. Based on our calculation, which includes domestic mill use and export commitments from August to October, the US has only about 1.4 million bales of current crop cotton left for sale.
 
Against all these bullish factors (lack of current crop availability, bullish Chinese market, spec buying) we have a new crop scenario that looks increasingly bearish, especially after today’s US Planted Acreage report, which at 10.0 million acres came in about half a million acres above the consensus estimate.
 
Texas (+200k) and Georgia (+150k) accounted for the majority of the increase and these two states combined are now at 6.8 million acres or 69% of total US Upland acreage. Assuming that around 9 million acres get harvested and plugging in a yield of 825 lbs, which we feel is conservative given the latest field reports, we would arrive at a crop of around 15.5 million bales.
 
However, since the Texas crop is off to an excellent start, with some comparing it to the record crop of 2007, we might see above average yields this year and a 16 million bales crop is therefore not out of the question. It may be too soon for such an optimistic outlook, but the market is starting to ‘discount’ this possibility in its price.
 
So where do we go from here? While the market is still in a 4-month uptrend dating back to February 29, it has recently started to move sideways, closing the last 25 sessions in a narrow 3-cents range between 63.00 and 65.99 cents. Several attempts to take out the 66.50 cents resistance level have failed despite massive spec buying. Sooner or later the inability to get past resistance will wear the spec longs down and with the uptrend line about to catch up to the market, it may only be a matter of days until the bullish tide turns and some of these spec longs get flushed out.
 
As mentioned above, the problem we have in regards to the futures market is that the December contract has to serve two masters, namely a bullish current crop and a bearish new crop scenario. Anyone who is bullish nearby, be it for fundamental or technical reasons, has only the December contract available to play his bullish view, but ultimately December will reflect what is going to happen four or five months down the road, which is shaping up to be bearish.
 
Since upside momentum has stalled and the technical picture is deteriorating, we feel that the market’s next major move is probably going to be down.

 

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