Market Comments – March 29, 2018

NY futures continued to slip this week, as May gave up another 69 points to close at 81.46 cents.

The market continued to move sideways, as May has now settled the last 25 sessions in a range of 438 points, whereof the last ten were in a narrowing band of just 234 points. This has formed another “flag” or “triangle” on the chart, with the current boundaries at around 82.30 and 80.70 cents. A break above or below these levels will likely spark the next significant move.

Support from mill fixations has so far kept the market above 80 cents, despite some light spec long liquidation. As of last Friday there were still 2.66 million bales unfixed on May and 4.93 million bales on July, for a total of 7.59 million bales in current crop. This number is very similar to what we had last season, when 7.34 million bales were unfixed at this point (2.78 May and 4.56 July). A year ago the spot month traded at just over 77 cents at the end of March and would eventually top out above 87 cents by the middle of May.

Whether we are going down a similar path this time around depends to a large degree on what speculators are going to do with their net long position. As of March 20 speculators were 8.74 million bales net long, which compares to 11.46 million bales a year ago. Specs would basically have to liquidate their entire net long position in order to generate the necessary liquidity for mills to fix their current crop commitments.

What makes the situation a bit more difficult for mills this season is that about 1.0 million bales of the net long has shifted to Index Funds, who are currently 8.0 million bales net long. Index Funds are passive investors, who would probably not make their longs available even if the market were to rally into the 90s.

US exports maintained their impressive pace last week, as 373,200 running bales of Upland and Pima cotton were sold for both marketing years combined. There were still 18 markets buying, while 25 destinations received shipments of 453,200 running bales. Total commitments for the current marketing year have now reached 15.5 million statistical bales, of which 8.15 million bales have so far been exported. Additionally there are already over 2.9 million bales on the books for August onwards shipment.

The amount of unsold US cotton is shrinking fast with every one of these impressive export reports. We started the season with a supply of around 23.5 million bales (beginning stocks + crop), of which 18.9 million bales have so far been committed for export and domestic mill use until the end of July. If we further add the 2.9 million bales in export commitments from August onwards and reserve 0.9 million bales for domestic mill use from August to October, there is hardly anything left over.

Sure, some of the commitments from August onwards will be shipped from new crop, which will start to trickle in with the South Texas crop in August/September, but there is no denying that the US balance sheet is already very tight and will only get tighter as merchants clean out their remaining inventory over the coming months. This nearly ‘sold out’ situation will keep the market quite nervous in regards to new crop developments.

Today the USDA released its Prospective Plantings report, estimating that just under 13.5 million acres would get planted this spring, which would be about 7% more than last season. What will keep traders on their toes is that 8.12 million acres or 60.2% of the total is located in Texas/Oklahoma/Kansas, while Georgia accounts for 1.45 million acres or 10.8%. This means that 71% will be planted in areas that are prone to experience dry conditions, especially in a La Niña weather pattern. If we play around with average yield and abandonment numbers, we arrive at a crop of around 20 million bales, but that’s simply an unscientific guess at this point.

So where do we go from here? Not much has changed this week, as combined open interest in May and July has remained steady and mills are still burdened with a substantial amount of unfixed on-call sales.

While some speculators may have left the game, the core holding seems to have staying power. Fears of an all-out trade war have subsided somewhat this week, after the US has struck a deal with South Korea and more bilateral agreements seem to be in the works.

As stated before, the market’s next move depends largely on what happens with the spec net long position. If speculators hold on to their net long, or most of it, then prices are likely to spike higher at some point, similar to what we saw last season. Mills are at the mercy of speculators at this juncture, since they need a lot of sell-side liquidity to get out of trouble without forcing prices higher.

We feel that support from mill fixations is quite solid near 80 cents and while the market may continue to meander sideways for a while, the risk for significant price spikes into the high 80s remains.

 

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