NY futures moved slightly higher this week, as December added 72 points to close at 68.97 cents.
The market remained indecisive this week and December has now closed the last 12 sessions in a narrow band of just 121 points, between 68.25 and 69.46 cents. From a broader perspective this short-term sideways range sits right in the middle of a 66-72 cents range dating back to the middle of June.
The market is still stuck between a “friendly now” and a “bearish later” situation, as traders are waiting for big crops to refill depleted supply pipelines. Although it might be tempting to sell the market near 70 cents given the statistical outlook, the fact that cash cotton is in short supply for another 6-8 weeks makes traders hesitant to pull the trigger. The recent spell of rainy weather has also added to the trade’s restraint.
US export sales were about as expected at 218,300 running bales of Upland and Pima for both marketing years. Sales activity seems to be hampered by the high level of existing commitments, as traders are reluctant to add more before the outcome of the crop is known. There were 16 markets buying last week, while 22 destinations received shipments of 137,900 running bales. For the season we now have commitments of 7.8 million statistical bales, of which 1.4 million have so far been exported.
West Texas has turned cool and wet this week, with most cotton areas receiving between 2-5 inches of rain. High temperatures have dropped into the 60s, which has raised concerns in regards to heat units. Fortunately the forecast calls for a warming trend as we head into the weekend and the long-range model now shows above average temperatures for October as well, which would allow for a good finish and hopefully a dry harvest. In other words, there is still the potential for a crop of 10 million bales in the Southwest (Texas/Oklahoma/Kansas).
Most analysts seem to agree that the market will see some harvest pressure and possibly trade into the low 60s in the first quarter, only to recover quite strongly thereafter on strong demand, lower production and higher Chinese imports. At the moment China is still able to fill its production gap with Reserve sales rather than imports, but this is going to change at some point in the future. Opinions vary widely as to when that will happen.
When we look at how much China has supplemented its production this season with Reserve sales and imports, we come to the conclusion that demand has to be a lot stronger than we thought. China’s Reserve sales, which will end this week, are going to amount to around 14.8 million bales, whereas imports for the first eight months of 2017 were already at 3.7 million bales. These combined 18.5 million bales are a lot more than the perceived production gap of 14.0 million bales. Yarn imports have also remained strong and are on pace to reach the equivalent of around 9 million bales, which would be nearly the same as last season.
If demand has been stronger than anticipated, not just in China but possibly in other markets as well, it would help to explain why we have such a large discrepancy between the USDA’s global ending stocks number and that of other organizations. In the case of China it makes a big difference in regards to the timing of imports whether their stocks are at 30 or 40 million bales at the end of this season. We believe they will be closer to 30 million and we therefore expect China to become more active on the import front by the middle of 2018.
So where do we go from here? There is currently a shortage of cotton in the cash channels and the basis for early arrivals is therefore quite strong. Only once the crop has moved in and nearby commitments have been applied will the market start to feel some pressure. This will probably not be the case before the second half of November or early December. We therefore see December futures well supported, while March should eventually start to feel the crop pressure.
The market should remain range-bound for a while longer and then possibly move lower after December goes off the board. While we agree that prices in the low 60s or even high 50s are possible, especially if the spec longs get flushed out, we also feel that the market won’t stay there since the longer-term dynamics are shaping up to be quite friendly!
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