NY futures ended the week slightly lower, as May dropped 67 points to close at 76.10 cents.
After breaking below an intermediate uptrend line last Thursday, May corrected to a low of 75.05 cents last Friday, but has since managed to hold above 75.50 cents in the last four sessions.
Underlying support comes from mill fixations, with buy scales starting at 75.50 cents. The just released CFTC on-call report shows that as of last Friday there were still 11.52 million bales unfixed overall, of which 8.03 million bales are on May and July. This is a record amount, by a wide margin! By comparison in the last two seasons there were less than 3 million bales still open on May and July at this date. The only other season that comes somewhat close is 2010/11, when 5.98 million bales were unfixed.
The March contract has left the stage without any last minute fireworks and dropped to its cash convergence level of around 73-74 cents. This was low enough for the current owners of the certified stock to hold on to their inventory, since only 14,800 bales out of over 323,000 bales have been tendered so far. With open interest in March down to less than 28,000 bales, deliveries can't go up by much more. This is sending a signal to the market that the 74 cents level represents support from a cash market point of view!
Today the USDA took its first stab at new crop plantings, when it projected 11.5 million acres at the annual Ag Outlook Forum. That’s higher than the 11.0 million acres the NCC came up with a little over a week ago. Needless to say there is a lot of enthusiasm among cotton growers at the moment, but looking at the strange weather patterns we have been experiencing in the US this winter we get the feeling that it could turn out to be a challenging growing season.
The world needs all the cotton acreage it can get if it wants to meet mill demand once the Chinese reserve stocks are used up. We believe that these abundant stocks in China are masking a potentially bullish situation going forward and the market is already sensing it. The highest amount of cotton the world has ever produced was 127.46 million bales in the 2011/12-season, which was sparked by record high prices at the time of planting with December at over 120 cents/lb.
Since then China has permanently cut about 12 million bales from its production by diverting acres in its eastern growing region to food crops. Therefore, if the world were to produce another record crop like in 2011/12, minus the cut in China, it would amount to just around 115 million bales. India was already producing 29 million statistical bales (37.1 million Indian bales) in 2011/12, which doesn’t leave much spare capacity.
Meanwhile global mill use has been holding steady near or above 110 million bales for the last four seasons and is now creeping up towards 112.5 million bales. In other words, once the Chinese reserve cushion is gone, it will take near record crops to meet demand. It can be done, but only if weather and price cooperate, which is why the market needs to encourage production by moving higher. Prices in the 60s won’t do the job! We still have another season or two before the pressure mounts, but the writing is already on the wall.
So where do we go from here? After some light spec liquidation last week and a drop in futures open interest from 28.8 to 26.1 million bales, the market has stabilized and is finding strong underlying support from mill fixations.
The market seems to be in a stalemate at the moment. Speculators already sit on a near record net long position and can’t add a lot more, but don’t need to liquidate either since the trend is still going in their favor. The trade on the other hand can’t push the market lower with new shorts and eventually will have to cover its existing shorts, but mills are still waiting for a break into the low 70s. In other words, we are in a waiting game, with neither side willing to act at the moment.
This could continue for another 2-3 weeks, but sooner or later mills will have to become more aggressive with their fixations. Since 74 cents is seen as strong support both from a fundamental and technical point of view, we feel that the market will hold and eventually spike higher. Mills may once again try to escape by rolling into July, but time is starting to run short. The middle of June will mark the end of the line for these 8 million bales in unfixed on-call sales. Shorts should therefore use any dips to buy their way out of trouble!
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