NY futures continued to push higher during this holiday-shortened week, as December gained 111 points to close at 69.29 cents.
The market was a dull affair this week, although it managed to climb back above its long-term uptrend line dating back to February 29, which is seen as constructive. Open interest increased slightly since the market rebounded from a low of 65.50 six sessions ago. This is a sign that speculators are no longer exiting positions and that they may even be adding some new longs in here.
However, with open interest being already relatively high at 23.2 million bales and with speculators still 7.7 million bales net long, they may not have that much additional buying power considering that the largest position specs ever owned amounted to roughly 11 million bales net.
This means that it would have to be the trade that forces the market higher via short-covering, but with harvest just around the corner and the supply pipeline starting to fill up again, it would take a compelling reason for the trade to chase the market higher.
The 14.6 million bales trade net short consists mainly of unfixed on-call sales and basis-long positions of various origins, and while mills have adjusted their fixation levels slightly higher and have booked additional quantities for nearby shipments, the are unlikely to pay up beyond a certain level.
Traders seem to be waiting for Monday’s WASDE report before deciding on what to do next. The US crop will probably garner most of the attention and according to private estimates we should see an increase into the low-to-mid 16s. In its last report the USDA had the US crop at 15.9 million bales with a yield of just 800 pounds/acre.
Although this would be an improvement over last year’s disappointing yield of just 766 lbs, the 10-year average before that amounted to 827 lbs. In other words, if the US crop were to make average yields, it would add roughly 500,000 bales to the current estimate for a crop of 16.4 million.
While supply is expected to see slight gains, the same should hold true for mill use. With the ROW basically running out of available stocks and with Chinese mills still devouring reserve stocks at a frantic pace, we feel that mill use has been stronger than statistics give it credit for. Chinese auctions have now reached over 10 million statistical bales and will probably get to 12 million by the end of the month.
However, demand is likely to face headwinds in a rising market, as man-made fiber competition becomes more of a threat. We further need to assess how much the resurgence of the Chinese textile industry has affected yarn imports from India, Pakistan or Bangladesh. The latest yarn export figures from India have been disappointing and are probably a reflection of high local prices and increased Chinese competition.
Regarding Chinese cotton imports we frequently see ‘bearish’ reports pointing out how much imports have declined in recent years, from 14.1 million in 2013/14 to 8.3 million in 2014/15 to the current level of 4.5 million bales. What these report fail to mention is that China couldn’t import more than that, even if it wanted to, because the ROW doesn’t have more to give!
ROW stocks have been extremely tight this summer and they are projected to be very tight again at the end of next summer. Therefore, since the ROW is expected to run just a 4.3 million bales production surplus this season, China can’t really buy much more than 4.5 million bales, even if it tried to. This will become an issue in a season or two, when reserve stocks have been cut down to a low enough strategic level (20-25 million bales) and China will therefore increasingly have to rely on imports again.
So where do we go from here? As mentioned last week, we believe that support underneath the market is rather solid at around 66-67 cents, due to the 6.99 million bales in unfixed on-call sales and pent-up demand for nearby shipment. Resistance is more difficult to ascertain, but we feel that at 71/72 cents the market will start to struggle from a fundamental point of view, unless there are some last minute setbacks on the supply side.
Options volatility has come in a lot over the last few weeks, which is also an indication that the market is starting to settle for a trading range. Outside influences, like a considerably weaker or stronger dollar, or trouble on the economic front, could push the market outside the above mentioned boundaries, but for now we assume that we will operate in a slightly higher trading range than over the last two seasons.
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