Market Comments – July 27, 2017

NY futures remained basically unchanged, as December closed the week just 9 points lower at 68.89 cents.
The market has been going nowhere, as December has settled the last eight sessions in a range of just 87 points, between 68.11 and 68.98 cents. Volume continued to be lackluster between 11k-22k and total open interest has held steady at around 216k.
The market is still stuck between a bullish near-term reality and a bearish long-term projection. Inventories outside China will be near historically low levels by the time new crop arrives, but that may not matter as long as the major crops around the globe are able to deliver what they promise.  
US export sales of 265,000 running bales sales for the week of July 14-20 beat expectations, but it was the shipment number of 334,700 running bales that caught the market’s attention, since exports have now reached the current USDA estimate of 14.5 million statistical bales and there are still 11 days of data to come.
This means that US exports for the current season will likely end up at around 14.9 million statistical bales, which would drop US ending stocks from 3.2 to 2.8 million bales. Over the last 50 years there were only 7 seasons when US ending stocks were at 2.8 million or lower. The 1990/91-season had the lowest carryover in recent history with just 2.34 million bales.

However, considering that there will already be an estimated 6.4 million bales in export commitments on the books for August onwards (including the carryover from this season) and that US mills will consume 3.4 million bales next season, then these 2.8 million bales in ending stocks will be the bare minimum needed to prevent supply disruptions.
The weakening US dollar is another element of support, as the USD index has fallen from around 103 last November to below 94 today. While the US dollar index is mostly composed of European currencies and the Japanese Yen, we are seeing a similar trend across the globe. The Indian rupee has strengthened from around 68 to 64 since the beginning of the year and the Chinese Yuan has appreciated from 6.96 in early January to 6.73 today.
This means that not only did the price of cotton drop in cents/lb, but foreign buyers got an additional discount due to the weakness of the dollar. Thanks to the stronger Yuan the CC-index in China is still at around 107 cents/lb despite slightly lower domestic prices, which is nearly 40 cents above the US futures market. US cotton therefore remains attractively priced and should continue to attract a lot of buying interest.
The CFTC spec/hedge report showed a further reduction in the spec net long position to just 1.29 million bales, with most of the drop coming from new spec shorts rather than spec long liquidation. On the trade side we saw a reduction of net shorts to 8.58 million bales and here it was new outright trade buying rather than short covering that caused the drop. Both the spec net long and the trade net short position are now at their lowest level since mid-April 2016.
So where do we go from here? The market seems too cheap to sell below 67 cents and too expensive to buy above 70 cents given the high expectations for the coming crop. However, since US cotton is relatively cheap compared to other growths we feel that there is greater risk to the upside.
Current crop stocks are all but gone and a perfect transition to new crop supplies is needed in order to prevent any disruptions and price spikes. If all turns out well this fall then there might be additional price pressure later this year or in the first quarter, but for now we see no need for the US futures market to make new lows. A retest of the 72 cents resistance area is more likely in our opinion. We also feel that the Dec/March inversion has further to go as we head into the fourth quarter.

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