Plexus: Market Still Has More Questions than Answers

New York futures ended the week (October 2) mixed, with December edging up 45 points to close at 61.85 cents/lb, while March dropped 51 points to close at 60.53 cents/lb.

While December managed to stand its ground this week, the deferred contracts came under additional pressure as the market continued to discount a long-term bearish scenario from which it may be difficult to escape for years to come. As a result, we saw the December/March inversion expand by nearly 100 points this week, with the spread closing at 132 points.

Advertisement

Over the last five seasons, global output has exceeded mill use by 58.9 million bales, and it was only thanks to China’s willingness to absorb the entire surplus that international cotton prices remained at elevated levels. This has, of course, changed this season, since China is no longer willing to carry the load all by itself and is shifting some of the burden back to the rest of the world (ROW).

The market is still in the process of figuring out how much of an impact this will have on the ROW balance sheet, which depends mainly on factors like crop size as well as Chinese cotton and yarn imports. Our best guess at this point is that ROW stocks will grow by some 6-7 million bales over the course of the season to around 44-45 million bales, which would be slightly higher than the current USDA estimate of 43.4 million bales.

Although governments in the U.S. (loan) and India (MSP) may temporarily assist in carrying the increasing stock burden, it will ultimately be the trade (growers, merchants and mills) that will have to hold the bulk of these inventories. In order to facilitate this task, we should eventually see full carrying charges between the various futures months, starting with the March contract.

Top Articles
Putting the Best of Both Worlds Together

December will most likely continue to detach itself from the rest of the board, since it follows different supply/demand fundamentals. While there may be more than enough cotton available after the turn of the year, the pipeline is currently about as empty as we have ever seen it. And, with the U.S. crop being later than normal, it may take some time to restore supply flows.

Weather remains a concern in that regard, especially when it comes to West Texas. Most fields in the Lubbock area still need a few more weeks until they are finally ready for harvest and therefore remain vulnerable to the cooler and wetter conditions that are forecast by the longer-range models. The recent nosedive of the Arctic Oscillation index, which shows the most negative readings for October since 2002, is likely to send cold, Arctic air deep into the U.S. over the coming weeks, while the storm track also remains farther south.

What worries us is not so much the size of the crop, but quality and fiber characteristics, since growing conditions have been challenging this season. Merchants are taking a chance by continuing to push sales of U.S. cotton without knowing the quality composition of the crop yet. This could backfire if the weather doesn’t cooperate over the next 4-6 weeks.

Last week’s U.S. export sales amounted to a combined 236,400 running bales net, with 22 markets vying for a piece of the action. Shipments continued to be slow at 79,300 running bales, which is due to the limited availability of cotton at this point. Total commitments for the season now amount to around 5.7 million statistical bales, of which just 0.8 million bales have so far been exported.

So where do we go from here?

If we add U.S. domestic needs of 3.7 million bales for the current season to these export sales, we arrive at 9.4 million bales in total commitments, which amounts to about 50 percent of the expected supply this season (2.45 million beginning stocks + 16.5 million crop). This is a fairly high percentage considering that the crop is still mostly in the field, which leaves not much room for error. Any threat to the availability of premium grades would catch the market by surprise and send the shorts scrambling for cover.

We therefore remain cautiously bearish, mindful of the fact that there is still a lot of weather to negotiate. We would further advise to play any bearish scenarios via the use of options until the outcome of the crop is known.

 

THE ABOVE IS AN OPINION, AND SHOULD BE TAKEN AS SUCH. WE CANNOT ACCEPT ANY RESPONSIBILITY FOR ITS ACCURACY OR OTHERWISE.

Source – Plexus

 

0