Market Comments – September 21, 2017

NY futures continued to move lower this week, as December gave up another 87 points to close at 68.25 cents.
Before today’s weakness December had closed the previous seven sessions in a very narrow range of just 43 points, between 69.07 and 69.50 cents. This price action has formed a ‘triangle’ or ‘flag’ on the chart, which reflects a pause or indecisiveness, and gets usually resolved by the market resuming its prevailing trend. 
This is what happened today, when December broke out of this triangle formation, which triggered some spec long liquidation. Although open interest in December has been declining from about 14.7 to 13.7 million bales since it posted a contract high on September 8, speculators are still quite long and wrong at this point, which makes the market vulnerable to further liquidation. 
The latest CFTC report showed that as of Tuesday, September 12, which was the day the market had closed locked limit down at 69.11, speculators were actually 1.36 million bales more long than the week before. In other words, despite the market falling by over 600 points from its contract high, speculators were getting longer and owned 6.93 million bales in net longs last week. Since most of these longs are under water at this point, we have to assume that there is more spec selling ahead.
Meanwhile the trade took advantage of the weather-induced rally and boosted its net short position to 14.34 million bales as of Tuesday a week ago. If crops in the US and elsewhere turned out as large as expected, the trade would have to do additional short hedging, which should also weigh on the market going forward. 
Other than weather worries the market didn’t really have a lot going for it and with the tropics finally calming down and crops getting closer to the finish line, the weather premium is starting to fade away. West Texas has had some warm weather lately that has pushed the crop along, although it is turning a lot cooler and wetter next week, which is going to slow things down again. However, at this point it is probably more a question of quality than quantity. 
US export sales were about as expected, as a combined 335,200 running bales of Upland and Pima were sold for both marketing years. Participation was broad-based with 18 markets buying, while shipments of 181,300 running bales went also to 18 destinations. For the season we now have commitments at 7.55 million statistical bales, of which 1.20 million bales have so far been exported. For the 2018/19-season there are already 0.8 million bales on the books. 
If we include commitments to domestic mills of around 3.4 million statistical bales, then we have total sales of nearly 11 million bales, out of an expected supply of some 23.0-23.5 million bales (beginning stocks of 2.75 + crop of 20.25-20.75 million bales). In other words, commitments are almost at the halfway mark and we still don’t know what this crop is going to yield in terms of quality. 
We believe that this uncertainty regarding the quality mix is one of the reasons the market hasn’t come under more pressure yet, despite depressingly bearish statistics. The other reason is the massive amount of on-call sales that have yet to be fixed, which hit another record this week.
As of last Friday there were a total of 13.27 million bales in unfixed on-call sales, of which nearly seven million were on December and March. The difference between unfixed on-call sales and purchases is also at an extreme at 9.55 million bales. This large number of open-priced contracts should provide decent support underneath the market and absorb at least some of the expected spec selling that may lie ahead.
So where do we go from here? As crops are approaching the finish line and the weather premium is fading away, the bulls will find it harder to defend their territory. 
Spec longs are starting to feel the pinch since they are sitting on losing positions, while some members of the trade (growers, merchants) would like to add more shorts on rallies. This adds up to pressure on the market, with the only sizeable buying coming from mill fixations on a scale down basis. 
However, due to the large amount of forward commitments the basis for nearby cotton is quite strong and this should keep December relatively well supported, because merchant shorts are willing to pay better prices for prompt cotton than the board. Only once the harvest is in and we are past the Oct/Nov bottleneck will the pressure start to mount. We therefore see December holding 67 cents for now, but could see March drop into the low 60s later on. Timing is key, as every futures month follows its own dynamics.


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