NY futures gave back some of their recent gains this week, as March dropped 144 points to close at 72.34 cents.
After spiking to an intraday high of 75.37 cents on January 5, the market was unable to generate additional upside momentum and has started to come off again. The addition of 69,196 bales of certified stock since last Friday and today’s bearish WASDE report have been able to keep the market in check – for now!
Today’s WASDE report was definitely more bearish than the market had anticipated, mainly due to the big jump in the US crop to 16.96 million bales. However, overall ROW production was only up 0.10 million to 83.34 million bales due to an 0.35 million bales drop in Pakistan’s crop. But since ROW mill use was lowered by 0.65 million to 75.51 million bales, the seasonal surplus outside of China rose by 0.75 million to 7.83 million bales.
Since China is expected to take away only 4.5 million bales of the above surplus via imports, it will allow for some stock rebuilding in the ROW. In fact, after some other adjustments in the beginning stock and import/export numbers, ROW ending stocks are now expected to rise to 42.3 million bales, which is up 1.0 million bales from last month and 3.6 million more than last season. In other words, there should be substantially more cotton available this year and make for a smoother transition to new corp in the third quarter.
US export sales continued at a strong pace depite the New Year’s holiday, as another 251,700 running bales of Upland and Pima cotton were sold between December 30 and January 5. Participation was not as active as usual due to the holiday, as only 13 markets were on the buyers’ list, while 22 markets received shipments of 222,200 bales. Total commitments for the season have now reached 9.3 million statistical bales, of which 4.35 million bales have so far been exported.
The increase in unfixed on-call sales confirms that most of these new commitments are basis sales. As of January 6 there were at total of 11.13 million bales unfixed, of which 3.83 million were on March, 2.65 million on May and 2.41 million on July. March fixations were down by just 0.1 million bales from the week before, with is not nearly enough considering that only a little over a month remains to take care of the remaining 3.8 million bales.
Merchants continue to push sales of US cotton by luring mills with attractive basis offers and are thereby filling a lot of mill demand for the second and early third quarters. In doing so they effectively transfer pricing decisions onto mills and mitigate a later price war with origins like Australia, Brazil and India, which all still have substantial amounts for sale.
As stated before, market action over the coming months will not be driven by fundamentals, but are mainly a function of how these large spec and trade positions are dealt with. The latest CFTC report as of January 3 showed that specs were 10.90 million bales net long, while the trade was 17.23 million bales net short. Index fund owned the difference with their 6.33 million bales net long positions.
With open interest continuing to rise since then, these positions have probably grown even bigger by now. The question is ‘who will blink’ first, and our money is on the trade, despite efforts to scare speculators with an increasing certified stock. The problem we see is that the trade will have to reduce its net short position substantially over the coming months, from a 17-18 million bales net short to an estimated 10-11 million bales net short by mid-year.
In other words, the trade will be forced to be a net buyer, due to the many fixations that need to be fixed as well as basis-long positions that are either sold at a fixed price (less likely) or are transferred to mills in the form of additional on-call sales. So far trade buying has been replaced with new trade selling by growers, but this rotation within the trade will sooner or later slow down, at which point net trade buying will have to be met by spec selling.
However, since specs seem to be well entrenched in their long position, it will take higher prices to motivate them to sell. Unfortunatly we don’t see an easy way out for the many trade shorts who are trapped in this posistion structure.
So where do we go from here? Today’s break of 72.75 cents support (former resistance) has opened the door for some further downside in the sessions ahead, but we feel that there is a lot of trade buying waiting in the 71-72 cents ‘fixation zone’. Since we don’t see a major flush-out of specs longs, we feel the market will hold above 70 cents, regroup and eventually reverse higher again.
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