Plexus: Emerging Market Issues Send Prices on Erratic Ride

New York futures ended a volatile week slightly lower, as March dropped 130 points to close at 86.03 cents, while new crop December fell 271 points to close at 76.60 cents.

An escalating emerging markets crisis introduced additional uncertainty to an already complex cotton situation this past week, resulting in erratic up and down price action as traders tried to figure out the market’s next move. Bulls and bears both have some strong arguments at the moment, and it will be interesting to see who will emerge as the stronger side in this tug of war.

The bullish case is mainly built on a tight statistical situation in current crop and a relatively large trade net short position (10.4 million as of last week) that may get squeezed – similar to what happened a year ago. Although Chinese imports have slowed this season compared to the previous two, they seem strong enough to once again absorb the entire production surplus in the rest of the world (ROW) and possibly more. That means ROW inventories are likely to remain rather tight as we head into the second half of the season.

After another two weeks of stellar U.S. export sales in which over 1.0 million running bales were sold (most of which were on-call), our calculations show that unsold U.S. supplies – including beginning stocks – are probably at no more than 4.4 million statistical bales. Since many mills are not well covered for the second and third quarter – and with only a limited amount of machine-picked cotton available from other origins – it makes perfect sense for the U.S. to price itself out of the market in order to ration remaining supplies.

This has already happened to a certain degree, at least when looked at from a fixed price point of view. But mills have been trying to outsmart the market by buying on-call, which has the potential to backfire, as history has shown. Unfixed on-call sales increased by another 0.4 million bales last week and now amount to 6.35 million bales overall, of which 5.67 million bales are in current crop. While outstanding fixations dropped by 83,100 bales in March, they increased by 376,400 bales in May and July as buyers continued to postpone pricing decisions.

Even the emerging markets crisis has a bullish component to it, as growers tend to hold on to their crops to protect themselves against a drop in local currency, which limits ready available supplies and can trigger short-covering rallies.

The bearish camp is pinning its hopes mainly on record global stocks and on a deteriorating macro situation. Speculators large and small have been the main drivers behind this rally that lifted prices from the mid-70s to the high-80s since late November. As of last week, specs were 4.8 million bales net long – up nearly 6.0 million bales in just two months. The bullish case depends to a large degree on speculators staying long. Otherwise, a short-squeeze will prove difficult to play out.

As we have seen, when speculators are spooked by macro jitters, the downside can open up rather quickly.

The big question is whether this emerging market (EM) problem is just temporary or something more serious. It started last week when EM currencies came under pressure and long-term bond yields started to rise. Argentina’s Peso has dropped 20 percent so far this month – the most in 12 years – but it has sparked a global phenomenon, as countries like Turkey, Brazil, Russia or South Africa all saw their currencies under pressure while interest rates spiked.

As if someone had shouted “fire” in a theater, the hot money crowd suddenly rushed for the exit in search of safer havens like the U.S., Germany or the UK, where interest rates actually dropped as a result of this money transfer. The capital flight forced some EM central banks to intervene. While these interventions may work in the short term, they often scare investors even more because they are seen as an admission to a problem. Adding to these concerns are fears of a credit crunch and hard landing in China.

So where do we go from here?

Trade shorts have clearly painted themselves into a corner, and they keep hoping for spec long liquidation to get them out of trouble. However, if the emerging market situation calms down and specs stick with their longs, we could see an explosive short covering rally one of these days. Shorts may stall for time by rolling their positions from March to May and then again from May to July, but there will be a day of reckoning unless a deteriorating macro picture flushes the specs out first.

Merchants have increased the certified stock to around 150,000 bales. They will probably add more in an effort to stem the advance, but this may simply be good enough to force some carry in the market.

While trade shorts have no other choice but to buy back their contacts between now and June, spec longs have the option to roll their longs into new crop and pick up huge roll gains in the process. In other words, the shorts have to get out, while the longs don’t. That, in a nutshell, is the story that drives current crop prices higher.

New crop is still an entirely different story, as plenty of growers are waiting for an opportunity to put on some hedges against next season’s crop. December ran into heavy resistance at the psychologically-important 80 cents level last week. It has since dropped back below 77 cents, but we would not sell it here and instead wait for another opportunity.

 

The above is an option and should be taken as such. We cannot accept any responsibility for its accuracy or otherwise.

Source – Plexus

Leave a Reply

Market Analysis Stories
Market Analysis

Shurley on Cotton: Where Does This Wild Season Go From Here?

August 27, 2015

Cotton’s wild ride continues, thanks to a constant barrage of economic and policy forces.

Market Analysis

Cleveland: “Pickable” Bolls Unlikely from Late Texas Blooms

August 31, 2015

The time has passed to expect any of today’s blooms to make a “pickable” boll on the High Plains. While I hope every single one of them will be picked, do not expect many to make it to the basket.

Market Analysis

Cleveland: Amid Turmoil, Quality Still Drives the Market

August 24, 2015

Cotton had a remarkably positive week, considering its gains in the wake of a global meltdown of commodities and equities.

Market Analysis

Shurley on Cotton: On the Ropes, But Trying to Hold On

August 12, 2015

The past few weeks have not been kind to cotton. But new USDA crop reports may act like the referee stepping in to stop the damage just in time.

Market Analysis

Cleveland: Prices Seek New Floor Ahead of USDA Reports

August 10, 2015

We had long held that the 62 to 63 cent support would hold, but the market corrected us once again.

OA Cleveland
Market Analysis

Dog Days of August Keep Market on a Lazy Pace

July 31, 2015

In the absence of a weather event in the near turn, the dog days of August will keep this low volatility market backing and filling at a very slow pace.

Market Analysis

Cleveland: Market Movement Still Stuck in the Mud

July 24, 2015

It looks as if the cotton market is frozen in time, and some teeth may have to be pulled in order to get the market moving again.

Around The Gin
Product News

Falcon Adds Two New Automated Precision Soil Samplers

August 28, 2015

Falcon Soil Technology has added two new automated soil sampling systems to its product lineup.

Product News

HUMA GRO Adds New Boron Liquid Nutrient Formulation for Crops

August 28, 2015

BORO-MAX, a new boron 10 percent liquid nutrient formulation, is now available from HUMA GRO.

Product News

On-Farm Research Helps Ease Grower Questions About Enlist System

July 31, 2015

Southern cotton and soybean growers who have worked with the Enlist Weed Control System in on-farm research plots are now sharing their experiences.

Product News

Nufarm Introduces Panther SC Herbicide

July 24, 2015

Nufarm is introducing Panther SC herbicide, a new broad-spectrum herbicide for use in cotton and other Southern row crops.

Product News

USDA Deregulates Dow AgroSciences’ Enlist Cotton Trait

July 23, 2015

The USDA has deregulated Dow AgroSciences’ Enlist cotton trait in the United States.

Product News

Ratting Out Copper Theft

June 10, 2015

A simple alarm technology is helping to stop copper thieves who target irrigation systems.

Product News

EPA Approves New Premix for 2016 for Cotton, Soybean Weed Control

May 29, 2015

Cotton and soybean growers will have a new weed control option in 2016 with Warrant Ultra Herbicide, a premix of acetochlor and fomesafen.

Product News

Deltapine NPE Program Begins Eighth Year of On-Farm Variety Evaluation

April 28, 2015

Nearly 200 farmers will be part of the Deltapine New Product Evaluator program this year to help evaluate cotton variety candidates for the Deltapine Class of 16.

Latest News
Market Analysis

Cleveland: “Pickable” Bolls Unlikely from Late Texas Blooms

August 31, 2015

The time has passed to expect any of today’s blooms to make a “pickable” boll on the High Plains. While I hope every single one of them will be picked, do not expect many to make it to the basket.

Market Analysis

Shurley on Cotton: Where Does This Wild Season Go From Here?

August 27, 2015

Cotton’s wild ride continues, thanks to a constant barrage of economic and policy forces.

Market Analysis

Cleveland: Amid Turmoil, Quality Still Drives the Market

August 24, 2015

Cotton had a remarkably positive week, considering its gains in the wake of a global meltdown of commodities and equities.

Market Analysis

Plexus: Market Still Promising, But Keep an Eye on Global Financial Issues

August 21, 2015

Since August 12, the market has gained nearly 600 points, which is impressive considering what is going on in other commodities. But financial problems in key emerging markets could dampen demand – and prices.

Market Analysis

Cleveland: Bullish USDA Report Paints Brighter Price Outlook

August 17, 2015

Market gains of the past week announce another charge at 70 cents, leaving behind a life-of-contract low in December and painting a rosier price outlook for the out months.

Market Analysis

Shurley on Cotton: On the Ropes, But Trying to Hold On

August 12, 2015

The past few weeks have not been kind to cotton. But new USDA crop reports may act like the referee stepping in to stop the damage just in time.

Market Analysis

Cleveland: Prices Seek New Floor Ahead of USDA Reports

August 10, 2015

We had long held that the 62 to 63 cent support would hold, but the market corrected us once again.

Market Analysis

Dog Days of August Keep Market on a Lazy Pace

July 31, 2015

In the absence of a weather event in the near turn, the dog days of August will keep this low volatility market backing and filling at a very slow pace.

Market Analysis

Cleveland: Market Movement Still Stuck in the Mud

July 24, 2015

It looks as if the cotton market is frozen in time, and some teeth may have to be pulled in order to get the market moving again.

Market Analysis

Shurley on Cotton: The Path to 70 Cents Is Still Negotiable, but Rocky

July 24, 2015

The goal of 70 cents is still possible, but each passing day likely lowers the odds that we can get there. We just need to make sure we know what our alternatives are and act accordingly.

Market Analysis

Shurley on Cotton: Prices Tracking Back Down the Same Row

July 13, 2015

If cotton prices were a piece of heavy farm machinery, the market would have a serious compaction problem, tracking over the same ground time after time after time.

Market Analysis

July Supply Demand Report Proves to Be a Bear in Bull’s Clothing

July 13, 2015

The release of USDA’s July supply demand report quickly turned a big bull report day into a date with the big bear.

Market Analysis

Shurley On Cotton: A New Floor for Planted Acres

July 2, 2015

  By Dr. Don Shurley The long-awaited and much anticipated first estimates of actual crop acres planted for 2015 are

Market Analysis

Will Spring Rains Offer Price Relief in 2015?

July 2, 2015

Will this year’s decline in planted acres offer some price release sometime soon? That’s the question waiting for an answer.

Market Analysis

Late Week Fireworks Could Signal Something Bullish for Cotton

June 29, 2015

Round and round and round she goes… Where she stop no one knows. The circus crier could have found employment