NY futures continued to build carry this week, as July fell 362 points to close at 63.21 cents, while December gave up only 47 points to close at 65.96 and March was down just 24 points at 66.76 cents.
The July/Dec spread remained the main feature this week, as it has transitioned from a 192-point inversion to 275 points carry over the last ten sessions, a swing of 467 points. Until two weeks ago the inverted July/Dec spread was the lone bullish feature in this dismal cotton market and it has now moved into the bear camp as well.
As stated repeatedly, there just isn’t enough buying to stop this market from sliding, both in the futures as well as in the cash market. With large cancellations showing up in the export sales report, July was forced down to 63 cents today in order to entice someone to take the certified stock. And in the futures market we have both the speculators and the trade with net short positions, leaving ‘long-only’ index funds as the sole counter-party at the moment.
The latest CFTC report as of Tuesday, June 11, showed that speculators continued to sell the market, as they added 0.57 million bales to their net short position, which grew to a near record 4.05 million bales.
Meanwhile the trade was a small net buyer, reducing its net short by 0.12 million bales to 2.99 million bales. Index funds were also net buyers, adding 0.45 million bales to extend their net long to 7.04 million bales.
The trade remains quite under-hedged at just 2.99 million bales net short (vs. 20.02 million a year ago!), but interestingly this position is composed of relatively large outright longs of 7.55 million bales vs. outright shorts of 10.54 million bales. Nevertheless, in order to achieve a larger trade net short position, it requires speculators to turn into strong net buyers. In other words, unless speculators are triggered into buying massive amounts, the market seems to have no chance of reversing higher.
Today’s US export sales report showed a large amount of cancellations in current crop, although the number for all three marketing years combined still showed a net gain of 131,800 running bales. While new sales of 311,800 running bales were quite decent, they were spoilt by cancellations of 180,100 running bales, most of which happened in Turkey and China. Unfortunately there are more cancellations coming if rumors are correct.
Shipments were also disappointing at just 340,400 running bales and that puts a question mark behind the current USDA export estimate of 14.75 million statistical bales. At the moment we are looking at probably no more than 14.3-14.4 million bales.
Total commitments for the current season are now at 16.2 million statistical bales, of which 11.85 million bales have so far been exported. For the coming marketing year sales have risen to 4.1 million statistical bales, while commitments for the 20/21-season are currently at 0.2 million bales.
It is difficult to find a silver lining in the cotton market at the moment. The US crop had a rough start but seem to be catching up, the US and global economies project weakness ahead and speculators seems to show no interest in going long cotton, with today’s open interest of 178,654 contracts being the lowest since November 2015.
However, as we have seen earlier this week, a simple tweet from President Trump projecting hope on the US/China trade dispute was enough to spike the market 150 points in a matter of minutes. Just imagine what an actual trade deal might do!
So where do we go from here? A few months ago there was probably no one in the cotton trade that expected to see a 62-handle in July. We certainly didn’t! But an escalating trade war between the US and China, an increasingly bearish cotton balance sheet and speculators selling 16.3 million bales net since last June have forced the cotton market to its knees.
As a result of this relentless spec selling the trade has been lured out of its shorts and now finds itself severely under-hedged, at the mercy of speculators to rectify the situation. Maybe a trade deal or some weather issues will eventually trigger a wave of spec buying, but with the trade waiting to sell into such an event the market has probably not much room to the upside.
Thanks to the safety net of the US loan program the market is fortunately not a bottomless pit and we therefore see the downside risk as no more than 7-8 cents at this point, based on the current AWP of around 59 cents. The trade is therefore not likely to chase the market too much lower, at least not until the outcome of the crop is more defined. For this reason we believe that December will probably remain in its 6450-6850 range, which it has occupied for the last six weeks.
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