NY futures ended the week lower, as December dropped 70 points to close at 68.27 cents.
Not a lot has changed since last week, as the market continued to move sideways, waiting for crops to finally move in. December has now settled the last 18 sessions in a narrow range of less than 200 points, between 67.52 and 69.46 cents.
The market saw some brief excitement on Wednesday, after tropical storm Nate had formed in the Western Caribbean and was taking aim at the Alabama coastline. Call options buying and some short covering pushed December near the 70 cents mark, but it ultimately proved to be just another flash in the pan as the market has dropped nearly two cents since.
The latest forecast has the storm taking a more westerly track, with landfall expected somewhere near New Orleans. This would mean that Nate would move in between the major cotton areas of the Delta and the Southeast. While open fields might still see 2-4 inches of rain and strong winds, which could impact quality, it doesn’t look like a major problem at this point.
Another weather concern is a cold front moving into West Texas around the middle of next week, which is expected to drop high temperatures to just around 60 degrees F. Since a lot of the West Texas crop got planted in June, there is a risk that some of the bolls won’t fully mature. If this cooler than normal weather were to persist, it could affect yield as well as fiber quality, particularly micronaire.
However, by and large the US crop is now basically made, and half a million bales more or less won’t alter the fact that there will be an abundance of supply once we have moved past the short-term bottleneck. The other major crops around the globe are apparently doing fine as well.
US exports were once again middle-of-the-road at 213,200 running bales combined, with 17 markets participating. Shipments of 119,800 running bales went to 22 different destinations. For the season we now have commitments at around 8.0 million statistical bales, of which 1.5 million bales have so far been exported. For the 2018/19-season there are so far 0.8 million bales on the books.
Compared to last season current commitments are about 2.3 million bales larger, while shipments lag 0.2 million bales behind. In other words outstanding sales of around 6.5 million bales are running 2.5 million bales ahead of last season. The problem is that there is currently hardly any cotton available to apply against these sales, as there are just 0.35 million bales of old crop cotton left in the system, while the pool of unapplied new crop cotton amounts to only 1.0 million bales. The crop can’t arrive fast enough for shippers to finally meet their commitments!
The CFTC report showed that speculators reduced their net long position for a 3rd week, while the trade continued to cover shorts on dips. As of September 26 specs still owned a net long of 5.72 million bales (down 0.53 million on the week), while the trade had a net short of 12.99 million bales (down 0.60 million bales). Index funds accounted for the difference with a 7.27 million bales net long (down 0.07 million on the week).
So where do we go from here? Once the crops have moved in, we could be faced with a situation in which the trade may want to put on additional short hedges against inventories and on-call sales, while a weak chart might force speculators to abandon its net long. In other words, there may plenty of selling and not a lot of buying ahead, other than scale down mill fixations.
This brings early 2016 to mind, when both the specs and the trade went to net short positions, which pushed the spot month into the mid-50s. History doesn’t repeat itself, but it often rhymes!
Barring any last minute disasters we should slowly but surely see pressure build on the market. Still not sure about December due to the bottleneck situation, but since specs are long in the spot month, they could force it temporarily lower if they continued to liquidate. March or May are likely going to post the seasonal low; thereafter we expect Chinese imports to come to the rescue.
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