Market Comments – September 26, 2019

NY futures was basically unchanged this week, as December moved just 5 points lower to close at 60.28 cents/lb.

It was a rather boring and uneventful week, as traders don’t seem to know what to do with the current market. Since dropping back from its flash-in-the-pan rally, December has settled the last seven sessions in a very condensed range of just 63 points, between 60.28 and 60.91 cents. Volume has been anaemic and open interest hasn’t changed much either.

The CFTC report showed that it was indeed spec short-covering that pushed the market into the low 60s. Between September 11-17, during which December traded between 58.98 and 63.39 cents, speculators bought 1.00 million bales net, thereby reducing their net short position to 3.08 million bales. Index Funds were also light net buyers, as they increased their net long by 0.08 million to 6.20 million bales.

The trade was a scale-up seller, as it added 1.08 million bales to its net short position, which grew to 3.13 million bales. This is still nothing compared to the previous two seasons, when the trade net short amounted to 13.5 and 13.6 million bales, respectively. In other words, the trade would have to sell another 10 million bales to catch up to where it was in previous seasons.

We feel that the market’s current inertia is a result of the trade’s hedging strategy. While the trade would like to increase its net short position, it will only do so in a rising market.  Once the market drops below 60 cents, most traders are moving to the side-lines, since the government ‘put’ (=US loan mechanism) kicks in not far below that level.

In order for the trade to get higher prices, it would require speculators to cover their shorts and/or to add new longs. During the recent rally outright spec shorts covered only a little over a million bales and remaining outright shorts were still at a substantial 7.9 million bales, according to the latest CFTC report. The question is what would it take for speculators to abandon their bearish stance?

The technical picture has turned negative again after the failed breakout attempt and the only bullish trigger we can think of at the moment is a trade deal between the US and China, which would allow US cotton to be imported in greater quantities. This week China exempted some agricultural products from additional tariffs, among them soybeans and pork, but there was no mention of cotton. It is pretty obvious that China needs to import food in the wake of its swine flu crisis, but there is currently no immediate need for cotton.

US export sales improved slightly last week, as 178,300 running bales of Upland and Pima cotton were sold for both marketing years. Shipments remained relatively slow at 179,000 running bales. Total commitments for the current season are now at 9.0 million statistical bales, of which 1.7 million bales have so far been exported.

Considering that there were 17 markets buying, it may have been a lack of attractive offers rather than disinterested buyers that kept the overall sales figure relatively low. We keep hearing that basis levels are quite stiff at the moment and that shippers are reluctant to make additional short sales. Apparently, many growers intend to put their cotton in the loan and then take a wait-and-see attitude.

This could lead to a bottleneck situation as we head into harvest, similar to what we have seen in previous years. Once the crop is in, assuming that there are no major setbacks, we believe that the size of the crop will eventually do its job and start putting pressure on prices.

The US cotton belt has been experiencing mostly dry conditions with above normal temperatures lately and the 10-day forecast calls for more of the same. Harvest is therefore expanding rapidly in the Mid-South and Southeast, while West Texas still has around 4-6 weeks to go. Based on field reports we feel that the US crop should come in well above 22 million bales. The USDA currently has its estimate at 21.86 million bales.

So where do we go from here? The market seems to be stuck, as the trade would like to expand its net short position in the low-to-mid 60s, but speculators are no longer in a buying mood after the failed breakout attempt. It will take a new trigger, like a trade deal between the US and China, to get the ball rolling again.

The downside seems to be equally limited at the moment, as several attempts to move lower failed this week and the market managed to rebound every time. As explained above, the trade is reluctant to chase prices below 60 cents because of the near-term bottleneck and thanks to support from the government loan mechanism.

Therefore, unless we have a major new development on the trade or economic front, we don’t see prices moving much from current levels. Once the crop is in, we could see renewed pressure on values, but that’s still several weeks away. 

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