NY futures closed a volatile week unchanged, as December finished just 2 points lower at 79.01 cents, while March moved up 6 points to 80.54 cents.
December moved wildly up and down in a 367-point range this week, but in the end it settled almost at exactly the same level as last Thursday. This means that December has now closed the last 38 sessions, dating back to September 18, in a sideways range of just 402 points, between 76.00 and 80.02 cents.
Trading volume was heavy this week, averaging over 54k per session, as the market reacted to several important news items, while the GSCI roll started to add volume on Wednesday. Open interest dropped only 1,573 contracts over the last five sessions and remains quite elevated at 265,590 lots overall. In fact that’s the highest open interest ever for this date, nearly 30k more than last season and around 20k higher than in 2016.
The outcome of the US Mid-term elections was generally seen as positive by the financial markets, as a gridlocked Congress is not expected to pass any legislation that would be harmful to business interests. This sparked a relief rally in the stock market on Wednesday and this ‘risk on’ mood seemed to help cotton as well.
The US export sales report came in better than expected, as 112,200 running bales of Upland and Pima were added for both marketing years, despite cancellations of 64,200 running bales. However, this time China didn’t roll its commitments to the next marketing year, but outright cancelled nearly 48k, which has traders worried as there are still 1.26 million bales outstanding.
Exports picked up slightly at 154,400 running bales, as more cotton is becoming available for shipment. For the season we now have total commitments of nearly 9.9 million statistical bales, of which 2.3 million bales have so far been exported. For the coming season there are so far a little more than 1.9 million statistical bales on the books.
Despite a crop that is 2.53 million bales smaller than last season, US export sales are running about 0.7 million bales ahead of a year ago, while shipments are about 0.3 million ahead. Since exports were lowered to 15.0 million bales in today’s WASDE, the US sits in a comfortable position in regards to its export sales, as they have to average only about 133k per week (or about 155k if we allow for a carryover) for the remainder of the season.
Today’s WASDE report didn’t contain any real surprises. The US crop was lowered by 1.35 million bales, resulting from the storm damage in the Southeast. On the Indian Subcontinent the crops of India (-0.70 million bales) and Pakistan (-0.50 million bales) lost a combined 1.2 million bales. On the plus side we had Benin with an increase of 0.43 million bales. Overall production was lowered by 2.27 million bales to 119.39 million bales.
Global mill use started to come off as expected, but the 0.88 million reduction to 126.88 million bales wasn’t enough in our opinion and may have been the reason the market didn’t react more positively to the report, other than the knee-jerk reaction we saw right after the release. All of the reductions, with the exception of the 0.1 million drop in the US, occurred in markets that saw their currencies getting clobbered this year, like Turkey, India, Pakistan, Brazil and Indonesia.
We keep hearing of yarn stocks building in some key markets and of delayed L/C openings, which is at odds with the record demand number. Matching last year’s mill use of 123.28 million bales would already be an achievement in our opinion, but we are afraid that demand might eventually slip below that level. Let’s not forget that in 2016/17 global mill use was at 116.17 million bales and the global economy, particularly emerging markets, felt a lot more buoyant back then.
The USDA’s optimism on demand, combined with the steep drop in production, has produced a ROW ending stocks number of 42.74 million bales, which compares to 44.58 million last month, but is still higher than the 42.37 we had at the beginning of the season. This is due to the fact that China accounts for basically all of the global stock reduction in recent years, as it has de-stocked 36.6 million bales over the last four seasons. That’s an average of over 9 million bales per season!
There is some optimism in that going forward, since China cannot indefinitely continue to subsidise its production gap from its own stocks. Sooner or later China will have to ramp up its imports again, but the market may have jumped the gun anticipating this event.
Ultimately a lot depends on how global supply and demand shapes up. Two years ago we had a 9.51 million production deficit, last season it was a small surplus of 0.42 million bales and in the current season we are once again looking at a sizeable production gap of 7.49 million bales. But that’s of course predicated on record mill use, which is doubtful at this point. In all likelihood we will end up with a much lower production gap.
So where do we go from here? The market seems to be fairly priced here. Unless the global economy deteriorates, the recent lows at 75-76 cents are likely to hold. The question is whether the market can escape the 76-80 cents sideways trend to the upside? From a fundamental point of view we currently don’t see any justification for doing that.
However, the technical picture might hold some promise. With March taking over as the lead month next week, we notice that it is very close to its primary downtrend line dating back to early June. This important trend line currently runs through around 81.00 and the 200-day MA is at 81.18. In other words, we are not far from breaking through these two important resistance points, which would likely trigger some spec buying.
We therefore see the market as neutral to slightly friendly in the foreseeable future.
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