facebook_pixel

Plexus: Spec Movement Reveals Downside of Sideways Market

New York futures dropped precipitously during the week ending November 13, as December lost 346 points to close at 59.73 cents/lb, while March fell 353 points to close at 58.75 cents/lb.

The narrow five-week sideways trend ended abruptly on November 10, after another failed attempt to take out the recent highs led to a reversal that pushed prices below key support at around 61 cents, triggering a wave of spec selling over the ensuing sessions.

March had rallied all the way up to 63.70 cents that morning on what appeared to be another round of spec short covering, but it started to run out of fuel going into the monthly USDA supply/demand report. When the numbers failed to inspire additional buying, values started to cave in, and March ended the session 238 points below its high. The fact that the volume of nearly 78,000 contracts was the highest in four years added validity to this reversal and set the stage for aggressive spec selling.

The USDA report contained basically no surprises, apart from Burma being added as a previously unrecognized cotton producer and consumer with 630,000 bales in production and 700,000 bales in mill use. These additions helped to offset reductions of 500,000 bales in China’s production and mill use numbers. Other notable changes were production increases in the US (+140,000 bales) and West Africa (+150,000 bales), while Central Asia (-120,000 bales) and Australia (-100,000 bales) saw their crop numbers lowered.

Global ending stocks are now predicted at a record 107.36 million bales, which are 5.63 million bales more than last season. More importantly, rest of the world (ROW) ending stocks are expected to increase from 38.8 to 45.2 million bales – a jump of 6.4 million bales – as Chinese imports of 7.0 million bales won’t be enough to offset the ROW production surplus of 13.3 million bales. The only way to remedy this inventory overhang that now exists in China as well as the ROW is to discourage production and to stimulate consumption via lower prices.

The most recent CFTC report (November 4) showed the trade at 6.0 million bales net short. Index funds were 5.9 million bales net long, and speculators had just a very small 0.1 million bales net long. However, basically flat net spec position is quite deceiving, because it is the result of relatively large blocks of spec longs (6.7 million bales) and spec shorts (6.6 million bales), which have the potential to accelerate up or down moves.

We believe that the volatile trading action we have witnessed over the last 10 to 12 sessions is directly linked to this interplay of spec short covering and spec long liquidation, with the latter having gained the upper hand when the market broke to the downside last week.

Speculators were net buyers of 3.4 million bales since September 30, but, judging by this week’s action, they may now be in the process of rebuilding their net short position. This brings back the old dilemma of who is going to take the long side if both speculators and the trade intend to go short.

The futures market is a zero sum game, which means that there has to be a long for every short. Index funds are the only group that is long in the futures market, but they are not expected to increase their position anytime soon, since they are dictated only by money flows. Therefore, it is not possible for both speculators and the trade to increase their net short position at the same time. One of the two has to be a net buyer.

During the market’s decline between May and July, we saw the trade reduce its net short position, while speculators increased theirs. Back then, the trade was selling its dwindling old crop inventories, which required it to buy back short hedges while not quite ready to sell new crop futures yet. However, this time around, with Northern Hemisphere crops starting to stack up in warehouses, the trade may have a greater sense of urgency to seek some downside protection, often via bearish options strategies.

So where do we go from here?

With both the fundamental and technical picture pointing to lower prices, spec and trade selling is likely to weigh on the market until a level is reached at which buyers are willing to step forward in greater numbers. Support may come from the cash market, since non-U.S. growths have not been following New York down to the same degree, especially in India.

We still feel that the A-index will find support near 65/66 cents, which, in turn, should help to stabilize the futures market at around 57/58 cents. However, since markets tend to overshoot, we cannot rule out a quick move to 55 cents, although the market would probably not stay there for very long.

Upside potential has become very limited at this point, since growers and merchants will be ready to sell rallies in order to lock in a spread to the AWP. Therefore, the market is most likely to remain in a sideways trend in the foreseeable future, albeit at a slightly lower level than in previous weeks.

 

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

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

Still Optimistic, but Fundamentals Do Rule the Market

February 3, 2018

Last week’s price correction was overdue, yet the market is still positive. But it’s best to remember that the simple fundamentals of supply and demand do rule the day.

Market Analysis

“Here We Go Again” as Market Preps Another Run

January 26, 2018

The price breakout above 80 cents continues to build its base in the very low 80s as it prepares for its next challenge to the 85 cent level.

OA Cleveland
Market Analysis

Could Quality Shortage Push Cotton to a Dollar?

January 19, 2018

Cotton’s roller coaster price trip is on, and it’s really just beginning. The steep incline is in front of us.

Market Analysis

Shurley: Things to Consider as Prices Climb

January 19, 2018

The reasons for better prices seem fairly obvious, but the strength of the current uptrend has been surprising. Looking ahead, growers need to keep certain factors in mind.

Market Analysis

Cleveland: The Bull Will Continue Charging

January 12, 2018

Multiple market factors are at work, with demand continuing to lead the way to higher prices. That means the bull market will keep charging ahead.

Around The Gin
Product News

Bayer Shares the Risk with Cotton Farmers

January 26, 2018

Bayer offers replant, crop loss and yield protection to growers who plant FiberMax and Stoneville cotton seed.

Product News

Americot Adds New Sales Support in GA, KS and TX

January 23, 2018

Americot has expanded its sales support team in Georgia, Kansas and the Rolling Plains of Texas.

Product News

Indigo Offers Premium for Indigo Cotton Production

January 9, 2018

Indigo Ag has announced a new program that offers significant price premiums for U.S. cotton growers who contract to grow Indigo Cotton.

Product News

New Bayer Varieties Focus on High Yield, Adaptability

January 5, 2018

Bayer releases five new FiberMax and Stoneville varieties for introduction in 2018.

Product News

New PhytoGen TRiO Guards Cottonseed Investment

January 3, 2018

New PhytoGen TRiO seed treatment helps provide early season protection for young cottonseed from diseases, insects and nematodes.

Product News

Americot Adds Seven to Sales, Research Teams

December 20, 2017

Americot has added seven new sales and research associates to the company’s staff across the Cotton Belt.

Product News

Seven New Varieties in Deltapine Class of 18

December 11, 2017

Seven new varieties – including five Bollgard 3 XtendFlex offerings – join the Deltapine product lineup as the Class of 18.

Product News

Special Roundup Ready PLUS Incentives for Arkansas

December 7, 2017

Monsanto is offering a special Roundup Ready PLUS Crop Management Solutions platform in Arkansas for 2018 for growers planting XtendFlex cotton and Roundup Ready 2 Xtend soybean varieties.

Latest News
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.

Market Analysis

Still Optimistic, but Fundamentals Do Rule the Market

February 3, 2018

Last week’s price correction was overdue, yet the market is still positive. But it’s best to remember that the simple fundamentals of supply and demand do rule the day.

Market Analysis

“Here We Go Again” as Market Preps Another Run

January 26, 2018

The price breakout above 80 cents continues to build its base in the very low 80s as it prepares for its next challenge to the 85 cent level.

Market Analysis

Could Quality Shortage Push Cotton to a Dollar?

January 19, 2018

Cotton’s roller coaster price trip is on, and it’s really just beginning. The steep incline is in front of us.

Market Analysis

Shurley: Things to Consider as Prices Climb

January 19, 2018

The reasons for better prices seem fairly obvious, but the strength of the current uptrend has been surprising. Looking ahead, growers need to keep certain factors in mind.

Market Analysis

Cleveland: The Bull Will Continue Charging

January 12, 2018

Multiple market factors are at work, with demand continuing to lead the way to higher prices. That means the bull market will keep charging ahead.

Market Analysis

Cleveland: Don’t Ignore the Gift Horse. Feed the Market!

January 7, 2018

Don’t get caught looking a gift horse in the mouth. Cotton prices are at a profitable level for growers, and the market is asking to be fed.

Market Analysis

Shurley: New Year Cotton Policy Update

January 5, 2018

Recent legislative action in Congress could potentially bring cotton back under Title I commodity protection. Dr. Don Shurley explains the details.

Market Analysis

Shurley: December Report Seals the Deal

December 19, 2017

Based on the December USDA Crop Production numbers, any notion of this 2017 crop getting below 21 million bales seems unlikely at this point.

Market Analysis

It’s a Wonderful Day in Cotton’s Neighborhood

December 15, 2017

With apologies to Mr. Rogers…it’s a wonderful day in the neighborhood, and the cotton market has been mine.

Market Analysis

With Prices Rallying, It’s Time for “Significant Action”

December 8, 2017

The long-awaited rally above 70 cents appeared to mature this week. For those not already priced at 75 cents, it could be time to take significant action.

Market Analysis

Prices Push Above 70 Cents as Demand Remains High

December 2, 2017

Driven by tightening world stocks and led by an ever-increasing world consumption, cotton prices continue to move higher.