NY futures rebounded this week, with March gaining 72 points to close at 69.18 cents.
March has now settled the last 19 sessions - or just about the last four weeks - in an extremely tight 113-point range, between 68.06 and 69.19 cents. It is therefore no wonder that momentum indicators have flatlined and volatility readings are at just 15.5-16.5%.
Although the overall statistical picture continues to look bearish, there are two factors preventing the market from moving lower at the moment. The first one is the record amount of unfixed on-call sales, which last week reached 14.75 million bales overall, of which 1.57 million were on Dec and 4.96 million on March. That adds up to over 6.5 million bales that have to be fixed until the middle of February, which is an impressive number!
How did we get to such a massive unfixed on-call position? Ever since the crops got planted this spring, the bears have been in control of the narrative, telling the market how much prices were going to collapse due to all this excess cotton that would accumulate around the globe. Prices in the high 50s or low 60s seemed to be just a matter of time, which prompted merchants to push cheap basis sales and mills were happily buying them in anticipation of lower prices.
In other words the more bearish the outlook the greater the willingness of merchants and mills to speculate on lower prices. In the case of the US we now have a total of 13.2 million statistical bales on the books between domestic and export commitments, many of which have been sold at basis levels that are below current market rates.
And as we have already mentioned mills have loaded up nearly 15 million bales on which the price has yet to be fixed. By creating such a massive ‘proxy’ short position, mills have been standing in their own way and are preventing the market from moving much lower.
The second factor is quality, which isn't as good as last season in some of the major crops . For example, in the Memphis classing office the predominant quality grade is a 31-4, while in Lubbock around 35-40% are below 3.5 mike. In India several states like Telangana, Andhra Pradesh or Maharashtra have received too much rain and/or were affected by pink bollworms, while Pakistan has been complaining about low quality due to excessive heat.
This may have some implications on the trade front. Pakistan already stated last week that it had finalized 1.2-1.5 million bales in import deals, with most of the cotton coming from the US, West Africa and Brazil. Because of red tape or quality considerations India was not mentioned as one of the main suppliers. India could also find it more difficult to export to other markets if its cotton is of inferior quality this season, and it may even have to import more cotton than usual.
US export sales continued to surprise traders, as 525,000 running bales of Upland and Pima cotton were sold last week. Pakistan took the lion’s share with 290,300 running bales, leading a field of 15 other buyers. Shipments remained slow at just 100,600 running bales, which may have to do with the quality situation. Total commitments for the season have now reached 9.7 million statistical bales, of which just 2.1 million bales have so far been shipped.
So where do we go from here? The relatively high open interest in December, which was still at 24k contracts this morning, tells us that there are still quite a few fixations to be done. This should continue to underpin the market as we head into the notice period a week from now.
Once December is out of the way we might see a slightly softer market for a while, but with five million bales to be fixed on March we feel that the downside is limited to around 66-67 cents, unless something were to spook speculators into selling.
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