Market Comments – February 28, 2019

NY futures gave back some of last week’s gains, as May dropped 119 points to close at 72.82 cents/lb.

While the long-term trend dating back to last June remains bearish, May has been moving sideways in 463-point range for the last 46 sessions, closing no lower than 71.11 and no higher than 75.74 cents. The market held up relatively well this week considering that the news was mostly bearish.

First we got the long awaited batch of six export sales reports last Friday, which came in at the lower end of expectations. While gross new sales added up to 1.52 million running bales for both marketing years, cancellations of 0.34 million bales brought net sales down to just 1.18 million running bales. A positive was that there were 27 countries participating, which shows that US cotton still has widespread appeal.

This morning we got an additional export sales report for last week, which showed that 106,900 running bales of Upland and Pima cotton were added for both marketing years. Looking at seasonal totals, we now have total commitments of 12.8 million statistical bales (vs. 14.0 million bales last season), of which 5.8 million bales have so far been exported (vs. 6.2 million bales last season). This means that the US will have to ship around 400k bales a week to make the current export estimate of 15.0 million bales, which could be a tall order.

Last Friday we also got the USDA’s first glimpse at the 2019/20-season, which wasn’t any help for the bulls either. The initial US crop estimate was pegged at 22.5 million bales on 14.25 million planted acres and relatively benign abandonment of just 9.3 percent. This may be a tad optimistic considering that rainfall in Texas has been below normal since November, with no improvement to the re-surging drought in sight.

The USDA sees global production rising sharply to 126.5 million bales, up 8.0 million bales from the current season and second only to the 127.4 million bales in 2011/12. Although mill use is expected to increase as well, from 123.6 to 125.5 million bales, it would still not be enough to keep ending stocks from rising.

Even though at first glance an increase in global ending stocks from 75.5 to 76.5 million bales doesn’t seem to be a big deal, the problem is that inventories in the ROW are expected to jump from 43.1 to 48.5 million bales, while in China they would drop from 32.4 to 28.0 million bales.

The ROW is expected to produce 98.5 million bales and consume only 84.2 million bales, leading to a seasonal surplus of 14.3 million bales, of which China is expected to absorb 8.9 million bales via net imports. Hence ROW ending stocks would grow by 5.4 million bales.

However, while the numbers as presented look quite bearish, these are just preliminary estimates and a lot can and probably will happen over the course of the season. Let’s not forget that as recently as last May the USDA had ROW ending stocks for this season at 50.3 million bales, which ultimately proved to be 7.2 million bales too optimistic. If the abnormal weather we experienced all over the globe over the last few months continues into the growing season, then we could be in for quite a ride.

The last two CFTC reports for the period of January 30 to February 12 showed some wild swings, as specs first covered some shorts and then became aggressive sellers again, boosting their net short to the highest level since early 2016. On February 12, when May had settled at 71.11 cents, speculators were 2.19 million net short, while the trade was 5.44 million bales net short. Index Funds were on the other side of the balance sheet with a 7.63 million bales net long position.

The March notice period has come and gone without much fanfare. Only 34 notices (3,400 bales) have been issued so far, which means that nearly all of the 131k bales in certified stock are staying with their current owners. This is due to the fact that futures represent more or less fair cash value at around 71-72 cents and/or full carry incentivized owners to hold on to their cotton for another two months.

So where do we go from here? We still feel that the trade will eventually have to boost its 5.4 million net short in order to manage risk on the net on-call position as well as physical longs in current crop and soon to be planted new crop. By comparison, a year ago the trade was still 15.05 million bales net short at this juncture and two years ago it amounted to 19.59 million bales.

We continue to see this relatively small net short by the trade as a potential problem in bearish market environment. Although speculators are now within 2.3 million bales of their largest net short ever, that in itself is no guarantee that they will turn into buyers anytime soon. But unless speculators become net buyers, the trade won’t be able to increase its short hedges.

In other words, we need a bullish event to trigger buying, otherwise the market will have to probe lower in order to uncover buyers. On-call fixations still provide some support in the low 70s for now, but with the planting window approaching we expect hedging pressure to intensify.

For this reason and given all the uncertainty on the political and economic front, we expect the market to remain on the defensive in the foreseeable future.

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