NY futures rallied this week, with July gaining 243 points to close at 87.46 cents.
After dropping nearly five cents to an intraday low of 83.36 cents, the July contract made a V-shaped recovery, jumping more than 600 points to a new contract high of 89.88 in just five sessions, between May 15-22, before pulling back to the current level. Strong volume and rising open interest confirmed the bullish price action.
Just when the bears thought that they finally caught a break after West Texas had received some long-awaited rain, the bullish focus shifted to China, where both futures and cash prices have rallied sharply since last week.
Over the last ten days, since May 15, the ZCE September futures contract has gained 1,215 yuan/ton, closing today at 16,875 yuan/ton. The ZCE January 2019 contract, which has been the most actively traded, has rallied 1300 yuan/ton and settled today at 17,690 yuan/ton. At an exchange rate of around 6.38 yuan per dollar, these prices correspond to roughly 120.00 cents/lb (September) and 125.77 cents/lb (January).
The Chinese Reserve Auctions followed the bullish trend on May 18, when 96.8% of the 30k tons offered were taken up at sharply higher prices. Since then 100% have been bought at every auction and the average price paid has gone up 750 yuan/ton (=5.33 cents) since May 17, from 14,477 to 15,227 yuan/ton (=108.26 cents). So far about 4.34 million statistical bales have been taken up.
While worries about the crop in Xinjiang combined with strong demand in the downstream sector set the ball rolling, prices were boosted by an influx of speculative buying, resulting in massive trading volume and record open interest. It is difficult to assess the Chinese situation at this point, but traders know that the large seasonal production gap, which over the past few seasons has primarily been filled with reserve stocks and to a lesser degree with imports, will eventually have to be covered by imports only.
The USDA currently predicts a Chinese production gap of 14.5 million bales for the coming season, but adverse growing conditions and/or stronger demand could widen this deficit. It is difficult to gauge how much more China has left to destock and at what point they will have to revert to more imports. The USDA currently has Chinese imports for the coming season at 7.0 million bales, but this number may ultimately prove to be too conservative.
As already mentioned, West Texas has received about 1-3 inches of rain across the region at the end of last week, but temperatures have warmed up again this week, with several stations expected to reach 100+ degrees F over the next few days. The recent rains may have helped to get additional dryland acres planted, but more rain is needed to avoid large abandonment as insurance deadlines approach in early June.
When we compare the current rainfall totals with those of last season, we find that they are not that much different. For example, Lubbock has received 1.26 inches in May and 2.16 inches since March 1st, while last season it had 0.58 inches in May and 2.57 inches since March 1st. In other words, Lubbock has received more rain in May this year than last.
However, last season there was more subsoil moisture available due to a wet winter, and what really made the bumper crop were abundant summer rains, as Lubbock reported 12.47 inches between June and August. Therefore, based on where we were last season at this point a decent crop is still possible, but unfortunately the long-range weather forecast calls for higher than normal temperatures and lower than normal rain. Normal rainfall for the June to August period would be 6.86 inches, or about half of what we got last season.
US export sales were slightly below expectations last week, as net new commitments of Upland and Pima cotton for both marketing years amounted to just 203,800 running bales. Since there were still 18 markets buying, it is possible that the drop in sales was due to limited supply/offers rather than a lack of buying interest. Shipments remained strong as 421,000 running bales went to 26 destinations.
Total commitments for the current marketing year are now at 17.25 million statistical bales, of which 11.8 million bales have so far been exported. There are nearly 11 weeks remaining until the end of the season. New crop sales have already reached around 4.4 million statistical bales.
So where do we go from here? The only thing that has changed is that another week has gone by without mills taking action. Today’s on-call report showed that as of last Friday there were still 4.66 million bales unfixed on July. Meanwhile, total unfixed on-call sales rose to a record 16.48 million bales.
Open interest continued to rise and has already reached 29.98 million bales, of which 12.43 million are in July. It seems that specs have started to roll some longs from July to Dec and added additional longs in new crop, which has put pressure on the inversion. The trade seems to wait for the roll period, during which spec and index fund longs will sell July and buy Dec. This process should provide the necessary liquidity for July shorts to get out and it might push new crop values even higher.
Whether the market will make another push to new contract highs remains to be seen and depends largely on how the situation in China and West Texas develops over the coming weeks.
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