facebook_pixel

Plexus: Market in Perfect Shape for a Short Squeeze

New York futures continued to advance, with March gaining another 222 points to close at 61.79 cents on February 5.

Since starting to move higher on January 26, the March contract has gained more than 450 points and managed to move through some key resistance levels, crossing above a five-month downtrend line and a cluster of moving averages all the way up to the 100-day. Buyers are now firmly in control of the market, with only two out of the last nine sessions closing slightly below their opening level.

The technical strength aligns nicely with what we have been witnessing in the cash market, where around two million bales of U.S. cotton were sold in the four weeks leading up to January 29. The latest U.S. export sales report came in above expectations, as 460,700 running bales of Upland and Pima cotton were sold to 19 different markets last week. Vietnam and China continued to lead the charge, taking once again more than 300,000 bales combined.

Total commitments for the current marketing year have now reached 9.9 million statistical bales – nearly as much as the current USDA estimate of 10.0 million bales – and we are just halfway through the season.

The U.S. balance sheet is starting to tighten up considerably, similar to what we saw happening last season. Out of a total supply of 18.5 million bales, we now have around 13.7 million bales committed between export sales and domestic mill use. A year ago, we had total supply at 17.0 million bales and commitments at 12.8 million bales. In other words, the current 4.8 million bales of unsold cotton are comparable to the 4.2 million bales that were still available a year ago, especially if we adjust the numbers for Pima, which had higher commitments last season.

However, there are a couple of key differences to last year.

First of all, the March contract was trading at 86.31 cents, or nearly 25 cents higher than now. But more importantly, March was trading at a 900-point inversion over December, which caused mills to slow down purchases of current crop cotton as they tried to stretch into cheaper new crop pricing. This is not the case at the moment, with current crop still trading at a discount to new crop.

Furthermore, with Brazil and Australia producing nearly three million bales less this season, the supply of machine-picked high grades is not as abundant as a year ago. Mills don’t have the luxury of waiting for cheaper prices down the road as they did last season, especially with plantings in the U.S. expected to be lower in 2015/16. Therefore, while the U.S. statistical situation is fairly similar to where it was last February, there is a greater incentive for mills to keep on buying U.S. cotton as we head into spring and summer.

The January 26 CFTC report showed something rather unusual – speculators being 9,800 contracts more net short than the trade, which is only the second time that has ever happened. The first time was on September 30, 2014, when speculators had 8,304 more net shorts than the trade. Traditionally, the trade tends to be on the short side, while speculators operate mostly from a net long position. Only after the emergence of index funds around a decade ago has it even become possible for the trade and speculators to be on the same side of the ledger.

While the net positions paint a fairly benign picture with specs at 2.9 million net short, the trade at 2.0 million net short and Index funds at 4.9 million net long, the outright positions look a lot more troublesome.

For example, speculators owned a record 9.0 million bales outright short position on January 26. Not even during the height of the financial crisis did speculators own more outright shorts than that. In addition to these specs shorts, the trade still had 11.0 million bales in outright shorts, while index funds were at 0.6 million bales. On the long side, we had speculators with 6.1 million in outright longs, the trade with 9.0 million and Index funds with 5.5 million bales.

There are several reasons why speculators are leaning so heavily on the short side this season – the negative outlook for commodities in general, fears of deflation, a stronger dollar and a global cotton balance sheet with an inventory nearly as large as a year’s worth of consumption. However, while these may all be valid reasons to see the cotton world at large in a negative light, they will do little to avert a potential short squeeze in the futures market.

So where do we go from here?

We believe that we currently have a perfect set up for a short squeeze. Tenderable grades are basically all committed or quite expensive, certified stocks amount to just 41,000 bales and speculators are about as short as we have ever seen them. Judging by the recent heavy spread activity, some shorts are trying to escape the squeeze by rolling forward, hoping for something to bail them out along the way.

This has led to a flattening of the price curve, with March, May and July closing within 35 points on February 5. A week earlier, the March/July spread was still at 172 points. We believe that this backwardation process will get more pronounced over the next four months and that current crop futures will move to a premium over December, similar to what we saw last season.

With the AWP moving up 150 points, a lot of cotton is moving out of the loan or is being “popped.” The trade has been selling futures in order to hedge some of this freed loan cotton. But with just a little over four million bales of U.S. Upland cotton unsold, there are not a lot of short futures needed anymore. Furthermore, as these newly established basis-long positions are being sold, futures will have to be bought back, which is why we believe that the trade will be a net buyer of current crop futures going forward.

New crop is a different story, as growers will use strength to put some short hedges in place. This should reinforce the above-mentioned inversion of current crop over new crop futures.

 

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

Source – Plexus

Topics:

Leave a Reply

Market Analysis Stories
Market Analysis

Shurley on Cotton: More Tariff Talk

April 9, 2018

The jury is still out on whether or not the “verbal war” between the U.S. and China will actually result in tariffs, and what the impact on cotton will be.

Market Analysis

Strong Demand, Drought Concerns Pushing Prices

April 14, 2018

Thanks to mill demand, shrinking quality stocks and increased drought concerns in the Southwest, cotton continues to post gains in spite of the selling pressure created by rolling positions to the July contract.

don shurley
Market Analysis

Shurley: This is Now USDA’s Number for Cotton

April 1, 2018

In my opinion, USDA’s March 30 Prospective Plantings report gets us much closer to what will eventually be the acres planted number.

Young Cotton Plant
Market Analysis

Cleveland: Start Pricing This Year’s Crop

March 24, 2018

Plant, plant, plant continues to be the motto. But it’s also time to add price, price, price to the discussion.

Market Analysis

Demand, Weather Concerns Driving Strong Trade

March 16, 2018

The market seldom sees a three-year price stream so favorable.

Market Analysis

Shurley: Pulling the Trigger on the 2018 Crop

March 16, 2018

Producing a cotton crop ultimately commits you to also sell the crop. But at what point do you say the price is “good enough?”

Market Analysis

Multiple Factors Driving Cotton’s Price Growth

March 9, 2018

The fundamentals of supply and demand – among other factors – continue to drive cotton prices toward the high 80s.

Around The Gin
Product News

FiberMax Honors One Ton Club Growers for 2017

April 17, 2018

The FiberMax One Ton Club recently honored 188 cotton growers who qualified for the club with their 2017 harvest results.

Product News

BASF Adds Engenia Spray Tool to Aid Applications

April 16, 2018

A new easy-to-use resource puts critical weather requirements for applying Engenia herbicide in one convenient location.

Product News

Reduce Timing Guesswork for Cotton Planting

April 16, 2018

Bayer’s online Cotton Planting Forecasting tool can help growers determine the optimal planting window to improve their chances at securing a strong stand.

Product News

Deltapine NPE Program Begins Class of 19 Evaluations

April 9, 2018

Nine Class of 19 variety candidates will be in growers’ fields this year as the Deltapine New Product Evaluator (NPE) Program kicks off its eleventh season.

Product News

Americot Expands Research and Sales Teams

April 5, 2018

Americot has added six new team members to the company’s research and sales staffs.

Product News

Greenleaf Introduces TipGuard Nozzle System

April 5, 2018

Greenleaf Technologies has introduced its new TipGuard System to protect spray tips from contact damage.

Product News

New BASF Reward Program for AR Growers Facing Dicamba Ban

March 27, 2018

BASF has revised its Grow Smart Rewards program to provide Arkansas growers alternative weed control solutions during the dicamba application ban from April 16 through October 31.

Product News

DuPont Vydate Products Fully Available for 2018

March 15, 2018

DuPont Vydate brand insecticide/nematicide products – including Vydate C-LV for cotton – will be fully available for sale and use during the 2018 growing season.

Latest News
Market Analysis

Strong Demand, Drought Concerns Pushing Prices

April 14, 2018

Thanks to mill demand, shrinking quality stocks and increased drought concerns in the Southwest, cotton continues to post gains in spite of the selling pressure created by rolling positions to the July contract.

Market Analysis

Shurley on Cotton: More Tariff Talk

April 9, 2018

The jury is still out on whether or not the “verbal war” between the U.S. and China will actually result in tariffs, and what the impact on cotton will be.

Market Analysis

Market Holds in Face of Tariff Rumblings

April 8, 2018

World consumption continues to support prices, but the mere suggestion of tariffs makes speculative fund managers nervous and increases market volatility.

Market Analysis

Cleveland: Prices Rally on USDA Acreage Report

April 1, 2018

USDA’s annual Prospective Plantings report pleasantly surprised the market, as seen by the price rally for cotton following the report’s release.

Market Analysis

Shurley: This is Now USDA’s Number for Cotton

April 1, 2018

In my opinion, USDA’s March 30 Prospective Plantings report gets us much closer to what will eventually be the acres planted number.

Market Analysis

Cleveland: Start Pricing This Year’s Crop

March 24, 2018

Plant, plant, plant continues to be the motto. But it’s also time to add price, price, price to the discussion.

Market Analysis

Demand, Weather Concerns Driving Strong Trade

March 16, 2018

The market seldom sees a three-year price stream so favorable.

Market Analysis

Shurley: Pulling the Trigger on the 2018 Crop

March 16, 2018

Producing a cotton crop ultimately commits you to also sell the crop. But at what point do you say the price is “good enough?”

Market Analysis

Multiple Factors Driving Cotton’s Price Growth

March 9, 2018

The fundamentals of supply and demand – among other factors – continue to drive cotton prices toward the high 80s.

Market Analysis

The Market’s Advice: Plant, Plant, Plant!

March 4, 2018

As world and U.S. ending stocks continue to shrink, growers have an opportunity to price the 2018 crop in the low 80s.

Market Analysis

Trucking Issues Limiting Timely Cotton Movement

February 24, 2018

Demand continues to exceed expectations. But new trucking regulations are putting a damper on timely movement of cotton and other ag products.

Market Analysis

Cotton Prices Settle, Poised to Climb Again

February 16, 2018

The market’s downside move appears to be over, ending a three-week downturn.

Market Analysis

Cotton Futures Nudge Higher, Despite Forecast for Rising U.S. Sowings

February 13, 2018

Cotton futures nudged higher, despite a much-watched survey on U.S. sowings showing a seven-year high, as the estimate came in

Market Analysis

NCC: Multiple Factors Offer Mixed Signals for Cotton

February 11, 2018

According to NCC economists, a few key factors will shape the U.S. cotton industry’s 2018 economic outlook.

Market Analysis

Talking Curveballs, Credibility and Carryovers

February 9, 2018

The February WASDE report served up a curve ball that caught the industry off guard. For the sake of USDA’s reputation, I hope they are correct.