NY futures continued to rally this week, as July gained 243 points to close at 67.88 cents, while December added 150 points to close at 66.64 cents.
July futures pushed through long-term resistance this week, leaving behind the “double-top” that had formed in late February and early April and posting the highest close since September 12. Volume has been decent and the fact that open interest keeps expanding tells us that bulls and bears are digging in, with neither side willing to concede yet.
Although the certified stock has been climbing to 80’778 bales, with an additional 6’100 bales under review, the fact that most of this cotton has not been put in play during the May notice period means that this potential “trump card” has been of little use to the many trade shorts that remain.
So far only 2’100 bales of certified stock have changed hands and with May open interest down to just 28’700 bales as of this morning, we already know that most of the certified stock will stay put. The question is why are the owners holding on to it, considering that there is no carry in the market? Could it be that this inventory was just put up for show, with no intention to actually deliver it? It certainly seems that way! At this point it doesn’t really matter though, because it will be another eight weeks before the July notice period rolls around and in the meantime basically all of the remaining open interest in current crop will have been liquidated.
US export sales continued to surprise positively, especially when we consider how little cotton remains for sale! For the week that ended on April 23rd, net new sales for the current marketing year amounted to 134’400 running bales, while commitments for the coming season rose by 42’900 running bales. This time is was Vietnam that led a group of 15 different markets. Shipments of 290’100 running bales remained well ahead of the 220K pace needed to make the current USDA estimate of 10.7 million statistical bales.
For the current season we now have commitments of 10.9 million statistical bales, of which 7.5 million bales have already been exported, while for the 2015/16-season total sales amount to 1.1 million bales so far. When we look at the US balance sheet, we have supply at 18.75 million statistical bales, of which 10.9 million bales have so far been committed for export and a further 3.65 million bales are going to domestic mills. This would leave 4.2 million bales by the end of July, but from that we need to subtract around 0.9 million bales for domestic mill use and an estimated 0.7 million bales in exports commitments for the August to October period. Therefore, if our assumption is correct, the US has no more than 2.6 million statistical bales left for sale between now and new crop, of which an estimated 0.3 million bales consist of Pima.
The US is not the only place that has limited availability over the next six months. West Africa has committed the majority of its crop by now and mills are therefore increasingly turning to Brazil for affordable high-grade cotton. However, there is not much old crop cotton left and it will still be a couple of months before Brazilian new crop supplies are available for shipment.
Beyond that India holds the biggest block of unsold cotton, but arrivals are still around 7.0 million local bales short of the final crop estimate and most of the premium cotton is held by the CCI, which has nearly 8.0 million bales still under its control. The CCI has so far done a marvelous job in managing its inventory and we expect it to feed its stocks back to the market in a measured way that is not going to put undue pressure on prices. Considering the relatively limited availability in these various origins and the fact that mills still need to cover more than half of their needs for the June to October period, we don’t expect much downside pressure on physical prices in the foreseeable future.
The weakening US dollar has certainly played its role in supporting cotton and various other commodities this week, as managed funds have taken a more “risk on” approach towards commodities in view of the sliding greenback. While the US was touted as the engine of growth last year, economic indicators have started to disappoint in recent months and it should therefore have come as no surprise that GDP growth was at an anemic pace of just 0.2% in the first quarter. However, currency markets didn’t react kindly to the news and started to scramble out of a very crowded “long dollar – short everything else” trade.
So where do we go from here? July had an impressive run over the last seven sessions, rallying from a low of 62.35 on April 22nd to a high of 68.06 today. This steep advance has brought about overbought readings and we therefore expect to see some consolidation or a pullback over the next few sessions. Trade shorts don’t seem to be too worried by this latest up move, since they are still willing sellers into strength, judging by the rising open interest. The biggest threat to the shorts is additional spec buying, which could push the market into a “hurt zone” and trigger short covering. We also need to keep an eye on the large open interest in call options, which in the 68 to 72 strikes alone amounts to nearly 23’000 contracts. This could turn into a catalyst that propels the market higher, similar to what happened in early April with the May contract. Expect to see some volatile trading in July over the coming weeks with a potential range of 64-72 cents!
December is being pulled up by July, although not to the same degree, since the July/Dec spread has continued to invert this week and may continue to do so. From a fundamental point of view December has become rather pricey, since it implies a value of around 76.00 cents for a US 41-4-34 landed Far East, which is far above what mills are willing to pay at this point. Unlike in the case of July, there is still plenty of time for December to produce and deliver cotton. We therefore believe that December will have to reconcile with the physical market once July is off the board, which in the current global value structure means lower prices.