NY futures ended the week little changed, as December dropped just 23 points to close at 67.50 cents.
The market made another run towards the higher end of its recent trading range, rallying for three days straight to reach an intra-day high of 70.00 cents on Tuesday, only to give it all back over following two sessions.
This time it seemed to be all weather-related, as fears of Hurricane Matthew doing some damage to crops in the Southeast encouraged buyers earlier in the week, but when the forecast changed for the better yesterday the market quickly sold off again.
As of this writing it looks like the Matthew is going to move up the Florida coast and then gets pushed out to sea by a fast approaching front from the west. What’s unclear is what happens after that, as some models suggest that it will loop around, possibly combine with another hurricane called Nicole and then pose another threat to the Southeast by the middle of next week.
At this point there is no major impact expected for the cotton crops of Georgia and the Carolinas. Georgia is of course the biggest crop in the Southeast with an estimated 2.4 million bales this season, but most of it is located in the southwestern part of the state and should therefore not be at any risk from Matthew.
South Carolina (370,000 bales) and North Carolina (550,000 bales) may get some rain and wind over the next couple of days, but probably nothing too detrimental. However, as mentioned above, what’s unclear at this point is whether hurricane Matthew and/or Nicole will return next week and what threat that might pose.
Apart from Matthew the US cotton belt is currently enjoying excellent weather conditions, which allows for harvest to expand at a rapid pace. As of today there have already been 1.4 million bales classed, with plenty of modules lining up. By comparison, last year it took until October 12 to cross the million bales mark. Other major crops in China, India, Pakistan and Turkey are also doing quite well at the moment, with estimates currently at or above the latest USDA assessment.
US export commitments for the week that ended on September 29 rose by 182,500 running bales of Upland and Pima combined, with 17 markets participating and 20 destinations receiving shipments of 219,700 running bales. For the season we now have total sales at 5.7 million statistical bales (or half of the current USDA estimate of 11.5 million bales), of which 1.7 million bales have so far been exported.
Futures open interest continues to be near an 8-year high at 24.8 million bales and what’s interesting is that during rallies open interest seems to go up, while it contracts only marginally during selloffs. For example, on September 19 the market was at 68.50 cents with an open interest of 23.2 million bales. During the rally that followed we say open interest jump by 2.4 million to 25.4 million bales. Since then the market has sold off to below 68 cents, yet open interest has dropped by only 0.6 million bales to 24.8 million bales.
This suggests that spec longs are digging in even though the market has been backing off, while the trade is equally determined to hold its ground. With speculators and the trade owning these relatively large positions, there is a lot of ‘stored up energy’ in the market that could be released at any time. The market seems to sense that, since volatility has been trending higher despite the market bouncing back and forth in a tight range.
So where do we go from here? The market continues to be locked into a tight range, with 65/66 cents providing solid support for now and 70+ cents representing resistance.
In order for the market to rally we would need trade short-covering, but that is not likely at this point since crops around the globe are doing well, while demand seems to be a bit softer.
For the market to sell off it would take enough spec long liquidation and/or short selling to overwhelm all the mill fixations that are located between 65 and 67 cents. Today’s on-call report showed that unfixed on-call sales have risen again last week and now amount to 8.03 million bales, of which 4.96 million are in December and March.
We therefore believe that the market will trade in a 65-70 cents range in the foreseeable future, but feel that if crops were to materialize as currently expected we could see this range slip by a couple of cents in a month or two.
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