Market Comments – December 4, 2014

New York futures rebounded since our last report of November 20, with March gaining 156 points to close at 60.42 cents/lb.
After closing the previous 14 sessions in a very tight band between 58.75 and 60.08 cents – a range of just 133 points – March started to break out to the upside today, boosted by a firmer cash market and possibly some spec buying.
The situation in the cash market continues to be tight, especially for high grades, as large quantities of US and Indian cotton remain sidelined by government programs, making it difficult for shippers to meet nearby commitments. Other origins like Brazil, Greece or Pakistan are unable to fill the void, as unsold supplies consist mainly of unsuitable qualities. 
A lot of buyers have therefore been turning to West Africa, which currently has the cheapest high grades available. However, with about half of the crops committed in Burkina, Mali and Ivory Coast, the January shipment window is rapidly closing and February won’t be far behind. It is therefore not surprising that Turkmen cotton has attracted some buyers last week, with an estimated 55’000 tons being sold at auction.
There is hope that US cotton may finally start moving out of grower hands, since the AWP will be set at 46.36 cents for the coming week, up from 46.06 cents. It looks like the AWP is turning the corner, as several factors point to further increases ahead. First of all, thanks to today’s rally in the futures market we should see a higher daily AWP right off the bat as we start the calculation for next week. Also, with the ‘nominal’ Pakistan quote likely to be replaced by Tanzania anytime soon, it should result in an immediate 40-point jump of the AWP. 
Once growers become convinced that the loan deficiency payment won’t increase any further, they will turn some of their cotton over to merchants, thereby greatly improving liquidity in the cash market. At this point it is difficult to gauge how much cotton will become available, as this largely depends on what the AWP does over the coming days and weeks. 
Most of the cotton coming out of the loan will be applied against existing domestic and export commitments, which have already reached nearly 11 million bales for the season (3.8 domestic/7.0 export). However, any cotton that forms part of a long position will likely be hedged with either futures or options. Therefore, the greater the amount of cotton streaming into the marketing channels over the coming weeks, the greater the need for short hedges. 
If the trade were to increase its relatively small net short position of 3.5 million bales over the coming weeks, speculators would have to take the other side. According to last week’s CFTC report, speculators were 2.1 million bales net short, with outright short positions amounting to 7.7 million bales. This large contingent of spec shorts certainly has the potential to act as bullish catalyst, especially if the technical picture were to improve along with a somewhat more optimistic fundamental outlook. 
The recent drop in the price of crude oil is a very positive development that will provide the lethargic global economy with a much-needed shot in the arm. If the current level of around US$ 65-70 per barrel could be sustained, it would save oil importers over US$ 500 billion a year. That’s US$ 40 billion every single month! Since the list of top oil importers is basically synonymous with that of top cotton consumers, including China, India, the US, Europe, Japan and Southeast Asia, we feel that there is a good chance for cotton consumption to get a decent boost.
Unlike various rounds of money printing by Central Banks, which have mainly benefitted debt ridden financial institutions and wealthy individuals, the drop in energy prices spreads across all layers of the economy. It is akin to a tax cut that leaves consumers with some extra dollars in their pockets every time they fill up their gas tanks or pay their utility bills. This should eventually lead to an increase in discretionary spending, including textiles and apparel. It couldn’t have come at a better time either, as we are in the midst of the all-important holiday shopping season! 
So where do we go from here? With a lot of US cotton still frozen in the loan, the AWP will have to move higher in the short term in order to free up much needed supplies. Since US domestic and export commitments have already reached nearly 11 million bales, price pressure may not start to build until the majority of the US crop has been flushed out of the loan and excess supplies are beginning to weigh on the market. 

However, the longer the current situation drags on, the better the odds for prices to hold. Seasonal lows typically occur between November and January and if the market escapes that window unscathed, things may start to look up due to lower planting intentions and an improving demand picture. Speculators have the power to tip the scale to either side and at the moment it seems more likely that they will reduce their net short than add to it.