NY futures continued their slide this week, as May gave up another 163 points to close at 74.51 cents.
Exactly one month ago, on March 6, the May contract had posted a contract high of 79.46 cents, but since then it has been downhill and the market has so far given back around 500 points. Specs longs have started to cash some of their chips to the delight of the many trade shorts that have been waiting for an opportunity to reduce their exposure.
Today the market closed right at the 13-month major uptrend line and a breach of this important support would likely flush out a big chunk of spec longs. Conversely, if the market holds the trendline like it has on previous occasions, it could shift the momentum back to the upside.
From a fundamental point of view the market seems to have value here based on what US cotton is selling for in the export market. This is also the level at which the March contract has found support back in February, with merchants hanging on to the majority of their certified stock at the time. Since then US export sales have increased by another 3.5 million bales and merchants are starting to run low on inventory to sell.
Until now shippers may have had an incentive to get rid of their stocks as fast as possible given the inversion to new crop, but we are now reaching a point at which this doesn’t really matter anymore. That’s because the futures market is now converging with the cash market and there won’t be much cotton to carry two months from now anyway since the US will basically be sold out.
It’s not as if prices needed to fall in order to stimulate business. Quite to the contrary! US cotton keeps selling like hot cakes week after week and inventories are dwindling fast. Last week total net sales amounted to 414,000 running bales of Upland and Pima cotton for both marketing years combined, with 19 markets buying and 23 destinations receiving shipments of 463,400 running bales.
Total commitments for the season have now reached 13.55 million statistical bales, of which 9.0 million bales have already been exported. Sales for “August onwards” are at 1.9 million statistical bales so far.
The most the US has ever exported in a season were 17.67 million bales in 2005/06, followed by 14.44 million bales in 2004/05 and 14.38 million bales in 2010/11. The current 13.55 million, if shipped by July 31, would already rank 6th all-time and there are still four months to go until the end of the marketing year. The record won’t be broken, because we would run out of cotton before reaching that target, but there is still a good chance to claim 2nd place. We estimate that at this point there are around 1.6 million bales still available for sale.
The latest on-call report showed that some progress was made last week, as unfixed on-call sales on May and July dropped by 0.92 million to 6.31 million bales as of last Friday. Since then this number has come down further and we estimate the unfixed balance in current crop to be at around 5.5 million bales at this point. That’s still a big number that will provide decent support in case the market were to suffer a technical breakdown.
So where do we go from here? From a chart perspective the market is at a razor’s edge, sitting right at the long-term uptrend line. At the moment the recent selloff is still to be viewed as a correction in a bull market, but a drop below this important support would change that and flush out some more spec longs. However, trade short covering would likely be there to absorb most of the selling. On the other hand, if the market were to hold over the next couple of session, the momentum could easily turn up again!
From a fundamental point of view current crop looks quite constructive as US exports continue at a blistering pace and with prices getting cheaper this is not likely to change until we are completely sold out. As far as we can remember this has never happened as prices typically rise to prevent that, which is why we shouldn’t get too bearish on May and July, and possibly even on December! We would therefore use any further weakness to get out of remaining short positions and fixations.
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