Market Comments – January 9, 2015

NY futures continued to trade sideways this week, with the March contract edging up 29 points to close at 60.56 cents.

It was another uneventful week, as the cotton market seems to have lost its momentum, with the 7- to 50-day moving averages all being flatlined within just 35 points of one another, between 60.49 and 60.84 cents. 

The same goes for the A-index and by extension the AWP, which will be set at 47.13 cents for the weekly period starting tomorrow, while the daily calculation is currently at 47.21 cents. So far around 7.6 million bales have been freed from the loan, which means that including beginning stocks of 2.5 million bales there are now 10.1 million bales outside the government loan system.

US export sales ended the year on a firm note, as 158’800 running bales of Upland and Pima cotton were sold during the week of December 26 to January 1. China was once again the major force in the market with 78’500 running bales, followed by Vietnam with 34’700 bales. Total commitments for the current marketing year now amount to 7.9 million statistical bales, whereof 2.6 million bales have so far been exported. 

Last week we thought that the upcoming auctions by the CCI in India might bring some new life into the market, but upon further consideration they may actually reinforce the current trading range. According to a senior CCI official the corporation hopes to start selling an initial tranche of 300’000 bales via e-auction as soon as January 15, based on a dynamic pricing system. 

If the CCI intends to feed its stocks to the market in relatively small portions month after month, it may generate enough buying interest from mills and traders to keep the auction price near the MSP or even exceed it for premium qualities. In other words, if the CCI manages to control the supply flow, local prices may remain confined to a relatively narrow range, not able to rally much due to increased availability, but not collapsing either since only relatively small amounts will be auctioned off at any given time. 

On Monday the USDA will provide us with its latest supply/demand numbers. While production estimates aren’t expected to change much at this point, consumption is still very much a moving target, even more so since the price of crude oil has dropped so precipitously over the last six months.

Crude oil is the lifeblood of any advanced economy and cheaper oil prices may achieve something that “Quantitative Easing” has not been able to, namely to stimulate oil-importing economies on the consumer level. While the trillions of dollars of money printing have primarily benefitted financial institutions, cheaper energy prices are like a big a tax cut across the board, providing consumers and businesses with some much needed extra spending power.  

These windfall savings vary from country to country, with US consumers seeing gasoline prices down nearly 50 percent compared to last summer, while discounts in Europe are less pronounced as oil companies and/or governments take a bigger cut for themselves.

Nevertheless, the magnitude of this drop in energy prices - which includes other energy sources such as natural gas and coal – is mindboggling! When crude oil was trading at US$ 100/barrel, the global annual production value amounted to around US$ 3.4 trillion dollars, which means that at US$ 50/barrel producers are losing about US$ 1.7 trillion dollars in revenue per annum, while users are saving that same amount. 

About half of global oil production crosses borders and therefore the trade value would drop by around US$ 850 billion dollars a year if the price of crude were to remain near current levels. Countries like the US and China are both big producers as well as importers, which means that certain sectors of the economy will take a hit. But overall these economies, along with those of other big oil importers like Europe, India, Japan, Korea and Southeast Asia, should see a boost in discretionary consumer spending. For this reason we are quite optimistic on cotton consumption going forward! 

So were do we go from here? The market has basically been stuck in a 59-63 cents sideways range since late September and there is nothing on the horizon that would suggest that a breakout up or down is imminent. Mills are for the most part still buying hand-to-mouth, while producers remain patient thanks to government support. Since commitments of US cotton are still running ahead of available supplies, we should see a few more flush-out rallies over the coming weeks in order to lure cotton out of the loan, but they will be more of the ‘flash in the pan’ kind than the beginning of a new bull leg. 

From a technical point of view the market barely has a pulse at the moment, although a move above 61 cents may bring back some spec buyers. Speculators basically a flat position overall, although outright longs and shorts still amount to a rather large 6 million bales, which have the potential to move the market. 

The longer the market is able to build a base, the better the chances for a move higher this spring or summer. Lower planting intentions may prove to be the catalyst needed to turn the ROW balance sheet as well as the negative market psychology around. We therefore maintain a slightly more friendly bias going forward.