Market Comments – October 19, 2017

NY futures continued to move lower this week, as December gave up 53 points to close at 67.31 cents.
After settling the previous 27 sessions in a tight 194-point band between 67.52 and 69.46 cents, the market finally cracked the lower end of this range today, posting its lowest close since August 18. It was a slow grind lower and volume wasn’t great at an estimated 20k contracts, but after making eight consecutive lower highs it seemed to be only a question of time until the bottom of this range would give in.
About a third of the US crop has now been harvested and the cotton pipeline is starting to fill up again. About 2.6 million bales of new crop have been classed so far and ginnings are increasing by about a million bales a week at the moment. West Texas is still lagging behind, hoping for enough warm days between cold fronts to finish the crop. Concerns in regards to yield and fiber maturity remain and we won’t know for sure how the crop turns out until the pickers are in the fields.
US export sales were quite good last week, thanks to business done during the ICA dinner in Singapore. Net new sales for Upland and Pima amounted to 279,500 running bales for both marketing years, with 20 markets participating. Shipments of 91,800 running bales were slow due to a lack of cotton in the pipeline, but they should improve now that the crop is moving in.
Total commitments for the current marketing year are already at 8.4 million statistical bales, of which 1.7 million bales have so far been exported. Sales for the 2018/19-season are so far at 0.85 million statistical bales. 
The CFTC report showed that as of Tuesday, October 10, speculators increased their net long by 0.23 million bales to 5.17 million bales. This marks the first uptick in the spec net long position in five weeks. The trade liquidated more longs than shorts, which increased its net short by 0.14 million bales to 12.25 million bales. Index funds sold 0.09 million bales net and thereby reduced their net long to 7.08 million bales. 
There are currently three main drivers in the market:
1) Speculators – they are still about 4 million bales more net long than they were in July and with the market now starting to break down technically, it is quite likely that we will see additional selling pressure from the spec sector. 

2) Growers and Merchants - with the crops now moving in rapidly there will be a need to increase net short positions in order to hedge excess cotton. At the moment shippers are still short cash cotton since they have committed around 12 million bales in the US alone between export and domestic sales. But once the crop has moved in and existing commitments have been applied, there will be a sizeable leftover that will likely get hedged in the months ahead. Carry should continue to build between March and July, which may create an incentive to hold cotton. 
3) Mills - they are the main buying force in the market, since they not only need additional supplies going forward, but they also have a record 13.9 million bales of existing sales that need to be fixed, of which 6.82 million bales are on Dec and March alone and a further 4.65 million bales on May and July. This scale-down fixation buying will be absorbing some of the potential selling pressure by specs and grower/merchants.
It is mainly a question of timing. Will specs get tired of their longs? Are growers/merchants going to hedge their incoming crops? Or will mills get nervous and step up their fixations? 
So where do we go from here? The path of least resistance seems to be down. Crop pressure is starting to build and the technical picture is now pointing lower as well. Mills need to fix a record amount of cotton but will probably take their time and do so on a scale down basis only. This should open the door for a move into the mid-to-low 60s, maybe not for December, but certainly for March. Only a last minute problem in West Texas or India would alter this scenario in our opinion.
In the longer term we still see the potential for higher prices, probably starting in the 2nd or 3rd quarter next year. With the CC-Index currently at just under 110 cents/lb, there is a great incentive for China to increase its imports sooner rather than later. A weaker dollar, La Niña concerns, inflation and strong mill demand are other factors that could underpin prices as we head into next season.


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