Market Comments – November 19, 2015

NY futures moved higher this week, with March gaining 96 points to close at 63.12 cents.

Even though the market edged higher this week, it has remained in a very tight closing range of just 114 points in the last 21 sessions, between 61.99 and 63.13 cents. From a longer-term perspective March is still in a wedge pattern, which is getting narrower by the day. The current boundaries are at around 63.60 to the upside and 61.85 to the downside. A breakout above or below these levels will likely spark the market’s next bigger move!

There has been a lot of downbeat commentary on US exports lately. Some of the more pessimistic views have US exports as low as 7.5-8.0 million bales, which is considerably below the current USDA estimate of 10.2 million bales. Slow mill demand and foreign growths stealing market share are among the reasons given for the dismal outlook.

We have a somewhat different view on this matter and believe that US exports will do just fine this season. Granted, the pace of US exports has been quite slow so far, but we are of the opinion that the world simply can’t get by without a sizeable amount of US cotton this season.

So far we have analyzed the global balance sheet mainly from a ROW vs. China point of view. However, we would like to go one step further and break it down into three parts, namely the US, China and the ROW (=every country minus US and China). The logic behind this is that the US is the big net exporter of cotton, China is the big net importer of cotton and the ROW is in between.

Therefore, when we look at the table below, which is based on the November WASDE report, we see that the ROW production shortfall combined with Chinese imports amounts to 13.29 million bales this season. This means that even if the US were to export the projected 10.2 million bales, which many US traders doubt at this point, it would still leave a seasonal deficit of 3.1 million bales, much larger than in the previous two seasons.

ROW PRODUCTION*

ROW MILL USE*

ROW +/-

CHINESE IMPORTS

SEASONAL DEFICIT

US EXPORTS

CHANGE IN ROW STOCKS

2013/14

74,747

71,994

2,753

(14,122)

(11,369)

10,530

(839)

2014/15

72,594

73,743

(1,148)

(8,284)

(9,432)

11,246

1,814

2015/16

67,345

74,881

(7,536)

(5,750)

(13,286)

10,200

(3,086)

The point of this table is to prove that US exports are needed to fill this rather large deficit in the ROW. Even if we were to adjust ROW mill use lower by 3.0 million bales, it would only serve to keep ROW stocks unchanged, provided that the US were to ship its estimated 10.2 million bales.

Let’s not forget that the market traded in the low 90s until April 2014. In other words, the statistics of 2013/14 were bullish enough to keep prices trading 30 cents higher than now. Sure, a lot has changed over the last two years, such as lower oil prices, a stronger dollar, shifting fashion trends and slowing global growth. But when we look at just the statistical picture as currently presented by the USDA, the market looks more bullish than bearish going forward.

Furthermore, machine-picked high grades, which have become more popular in recent years, seem to be less plentiful than last season. For example, in the US the amount of tenderable grades runs at just 58% so far based on the first 5 million bales classed. This percentage may increase slightly into the low 60%, but we estimate that the pool of tenderable qualities will be no greater than 7.5 to 8.0 million bales, which compares to around 10.9 million bales last season.

Therefore, since US cotton is needed to help fill this 13.29 million bales shortfall in the ROW, tenderable grades might not last all season, which could make things interesting next summer. Tightness in premium grades is not likely to show up anytime soon, especially if mills continue their hand-to-mouth buying pattern. But latest by the middle of next year we should see another supply squeeze in better grades, which is why we would advise mills to book their requirements for premium qualities now!

US exports for the week ending November 12 came in better than expected at 215,600 running bales for Upland and Pima combined. Participation was widespread, with 16 different markets buying. Shipments of 61,000 running bales were slow, but we expect the pace to pick up over the coming weeks. Total commitments for the season now amount to 4.3 million statistical bales, of which 1.6 million have so far been exported. Sales for the 2016/17-season are still at around 0.7 million statistical bales.

So where do we go from here? From a technical point of view we are still in a 60-68 cents sideways range, which has been in force for about 15 months now. Within that range there has been a wedge pattern forming, with a downtrend line dating back to June. A breakout above 63.60 cents would therefore be of some significance and likely trigger a wave of spec buying. The market seems to be positioning for such a move, since there have been a lot of call options bought this week.

From a fundamental point of view mill demand is still relatively slow at this point, but the statistical situation is quite friendly, although it may take until next summer for the tightness to manifest itself. Nevertheless, we feel that the downside is now fairly limited and that we are in a waiting game before the market finally makes its move higher.