NY futures reversed course this week, as July dropped 155 points to close at 64.58 cents, while December fell 134 points to close at 64.62 cents.
Like in late February the market’s most recent rally attempt ran out of steam at more or less the same level near 66.50 cents and the short-term trend has now started to reverse down again. As we have pointed out last week, a bull market needs to be constantly fed by either new long buying or short covering in order to keep its momentum alive.
With the large contingent of trade shorts once again standing its ground, by rolling May shorts into July or December rather than opting to get out, it managed to forestall any further upside momentum. This has not only taken any additional spec buying out of the equation for now, but it triggered some sell stops that protected recently established long positions.
After a disappointing export sales report this morning, the July contract first fell below its 200-day moving average, which calculates at around 64.50 cents, and then proceeded to test the 50-day moving average near 63.80 cents. After successfully staying above the 50-day despite being under pressure for most of the session, the market found some strength going into the close that lifted values back above the 200-day moving average. This may be seen as a sign of strength by the bulls and could attract renewed spec buying if July can hold above these moving averages tomorrow.
US export sales for the week ending on April 9 came in below expectations, as new sales of 36’400 running bales of Upland and Pima cotton were more than offset by cancellations of 46’600 bales, resulting in a net reduction of 10’200 bales for the current marketing year. However, since there were also 52’800 bales in new commitments added for the coming season, overall sales still increased by 42’600 running bales. Shipments were on the slow side as well with only 216’900 running bales leaving the country, but exports are nevertheless still on course to meet the current estimate of 10.7 million bales.
On a positive note, preliminary data showed that China imported cotton yarn at a record pace in March by taking in 248’000 tons, or nearly 40 percent more than a year ago. By applying a waste factor of 6%, this converts to around 1.2 million statistical bales of cotton or an annualized 14.5 million bales. Mills in China have reacted to high domestic prices and quota restrictions on raw cotton by increasing their yarn imports and shifting production to other countries, like Vietnam. These stronger yarn imports are helping to support rest-of-the-world (ROW) mill use and are mitigating the slower pace of Chinese cotton imports, which are expected to drop to just 5-6 million bales next season.
Although China is trying to reduce its massive stockpile by lowering production and curbing cotton imports, progress seems to be rather slow because domestic mill use is slipping as well as a result of these stronger yarn imports and spindles moving elsewhere. Next season Chinese production may decline to around 24-25 million bales, but if mill use were to drop to 32 million bales as some local observers believe and cotton imports amount to around 5-6 million bales, then Chinese inventories won’t be reduced by much more than two or three million bales next season. In other words, it may take a long while for China to reduce its stockpile to a more manageable level.
On the other hand, thanks to China potentially absorbing a combined 17-18 million bales of cotton and yarn from the ROW next season, while the ROW production surplus is expected to shrink considerably, we should see international prices fairly well supported. What may happen over time is that this dichotomy that currently exists between Chinese and international prices is going to disappear, with the two worlds potentially meeting somewhere in the middle. Nevertheless, with 110 million bales in global ending stocks, we expect there to be a strong ceiling on the market for at least two or three seasons to come.
So where do we go from here? We have no strong opinion on current crop futures at the moment and feel that July could easily go up or down 2-3 cents from here. It all depends on who is going to make the next move. Speculators seem to be on the defensive at the moment, but if the market shows some signs of strength, like it did today by holding important support, they may commit additional funds to the long side. On the other hand, if we see further weakness in the days ahead, spec longs will start to liquidate.
We expect the trade to be a strong buyer on dips from 63.50 on down, as merchants and mills are waiting for an opportunity to get out of their short exposure in current crop. The upcoming May notice period should provide us with some valuable clues regarding the fate of the certified stock, which as of this morning stood at around 60’000 bales.
New crop futures should encounter plenty of overhead resistance in the mid-to-high 60s, since grower hedging is expected to intensify over the coming weeks as Northern Hemisphere crops get planted.