NY futures continued to push higher this week, as December added another 110 points to close at 70.93 cents.
December has now gained 402 points over the last ten sessions, as the US crop has run into adverse weather that is causing a lot of uncertainty in regards to the crop’s size and quality.
When we look at how open interest has changed over this 10-day period, we notice that December saw a decline of nearly 2,000 contracts, which suggests that there was some short-covering in the spot month. On the other hand open interest in March and beyond jumped by around 6,000 lots, which signals that the trade was adding more short hedges as the market went up.
The growing Dec/March inversion has been reflecting these dynamics, as traders are becoming increasingly worried in regards to the nearby supply of high grades, while still hoping for an improved situation down the road.
Losses from Hurricane Harvey are estimated at around 500,000 bales and there is also some quality deterioration on a few hundred thousand bales in South Texas and Louisiana. The storm is currently headed up the Mississippi river as a tropical depression, dumping at times heavy rain on the crops in the upper Delta, which could lead to some boll rot.
A half a million bales gone from what was potentially a 21.0 million bales crop isn’t a game changer, but what has traders worried is the quality angle, especially with the tropics being so active at the moment. Not only do we have Hurricane Irma barreling across the Atlantic as a strong category 3, but there is also the possibility of another tropical storm forming in the southern Gulf of Mexico early next week.
So far only about 1.2 million bales of South Texas cotton have made it in safely and shippers need a lot more high grades to meet their September to November commitments. But at the moment the weather is not cooperating, which is why traders remain on edge.
It is not just tropical storms that cause some headaches, but it has been rather cool in the eastern half of the US for the past few weeks and the forecast calls for at least two more weeks of below normal temperatures. This raises concerns regarding fiber maturity, as a lack of heat units could affect micronaire, strength or fiber length. Fortunately the second half of September looks a bit warmer and hopefully this will help to push the crops over the finish line.
US export sales were once again quite strong considering that prices were on the rise, with 266,000 running bales of Upland and Pima finding a home in 19 different markets. Shipments were a bit slower at just 158,100 running bales, which is mainly due to the limited amount of bales in the pipeline.
Total commitments for the current season are now at 7.05 million statistical bales, of which 0.7 million bales have so far been exported. For the 2018/19-season there are currently 0.65 million statistical bales on the books.
So where do we go from here? Markets don’t like uncertainty and right now there is plenty of it! With an almost empty supply pipeline and with some of the early arrivals falling prey to bad weather, the margin for error has become rather thin. Heavy rain in the Delta at the moment and possibly another storm system bringing more unwelcome moisture next week are likely going to impact the quality of the 4.0 million bales grown in that region.
West Texas and the Southeast will hopefully save the day, but it will be several weeks before we know that and in the meantime traders remain nervous. Even if the crops finish well, it is almost a certainty that high grades are going to be in short supply over the next two to three months.
Shippers have raised their offering basis quite considerably this week, which means that they don’t want to commit any additional premium grades until the situation becomes clearer.
If there are no more setbacks then prices should eventually ease off again. But it will probably be a while before that is going to happen. December should stay inverted above March no matter what, since we cannot envision a situation in which there would be enough high grades by November to weigh down the spot month.
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