facebook_pixel

Plexus: Time for the Market to Rest and Regroup?

New York futures continued their impressive run this week, with May gaining another 188 points to close 64.69 cents.

Since posting a contract low of 57.95 cents on January 23, buyers have taken control of the market, pushing values nearly 700 points higher in the process without allowing for any major setbacks so far. A look at the candlestick chart clearly illustrates the current dominance by buyers, with the market closing 13 out of the last 18 sessions higher than it opened.

A lot of trade participants seem to be dumbfounded by this strong showing, considering that global inventories have never been larger than in the current season, both in absolute terms and on a stocks-to-use ratio. However, what some traders tend to forget is that the New York futures market is a localized play that reflects primarily the supply/demand dynamics in the United States.

Until recently, speculators and the global cotton trade projected their negative macro and cotton views onto the futures market by wanting to be short at a time when U.S. high grades were selling like hot cakes and basis levels trended higher. This led to one of those rare occasions in which speculators and the trade both had net short positions, leaving index funds as the only long. However, massive export sales during January finally tipped the scales. With the chart momentum shifting, speculators started to aggressively buy the market.

The latest available CFTC data tells us that speculators bought 4.7 million bales net in the two weeks between January 28 and February 10. Assuming that speculators continued their buying spree since then, we estimate total spec purchases at around 7.0 million bales since this rally began in late January.

There were a number of technical factors that triggered this massive spec buying, such as the breach of a five-month downtrend line and crossing above moving averages all the way to the 100-day. With momentum turning positive, it not only sparked short covering, but also attracted new spec longs to the party, which is evident from the fact that open interest has held up fairly well despite the ongoing March liquidation.

While specs were buying, the trade continued to increase both its net and outright short position. Between January 28 and February 10, the trade expanded its net short by 5.2 million bales to 7.2 million bales, while outright shorts grew by 2.1 million to 13.1 million bales. Even though some of these shorts may be against new crop, the trade seems to have its work cut out to liquidate the remaining current crop short position over the next four months.

The end of February typically marks a seasonal low, and this has a good reason. By now, most of the crop has transitioned from producers to merchants, who then proceed to sell their basis-long to mills during the remainder of the season. When merchants buy their cotton from growers during the early part of the season, they typically hedge the newly-acquired cotton by going short in the futures market. However, from around this point forward, the trade is usually a net buyer of futures, as short hedges get lifted when cash cotton is sold or mills fix existing commitments.

We therefore have a situation in which the trade is structurally set up to be a net buyer of current crop futures going forward, while speculators are interested in the long side from a technical point of view. With around 75 percent of total U.S. supply already committed and still eight months to go until new crop arrives, we don’t expect to see a lot of pressure on May and July over the coming months.

The opposite is true for new crop December, where the trade is expected to be a scale-up seller as we head into the planting season. With the exception of some market makers, speculators typically don’t play much in the back months. These dynamics are the reason why the May/December spread has moved from around 360 points carry to even since the beginning of the year. This trend is likely to continue.

So where do we go from here?

With the March liquidation now basically behind us, we may see the market pull back a bit and regroup over the coming weeks. Speculators have bought a lot these past few weeks and probably won’t keep this pace up, especially with momentum indicators in “overbought” territory. Trade shorts in May and July will likely wait for dips before reducing their exposure.

However, we don’t feel that this bullish move is over yet. It is just taking a breather.

With new crop hedging likely to intensify over the next two to three months, we feel that May and July have a good chance to invert over December by a considerable margin.

 

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

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

U.S. Sales Booming to Meet Bullish Demand

November 17, 2017

Cotton appears to be caught in a battle between supply and supply. And that keeps prices well positioned to stay where they are.

Market Analysis

Increased Cotton Demand Moving the Market

November 11, 2017

A bullish supply demand report for November proves that demand moves markets. And demand for cotton has resurfaced.

Market Analysis

Cleveland: Yields, Quality, Consumption Still Rising

November 4, 2017

Reports of high yields, premium quality and growing consumption are keeping prices at the higher end of the trading range.

Market Analysis

India and Frost Combine to Prop Up Market

October 27, 2017

India’s plan to keep more of its cotton for domestic use, plus a potential freeze in West Texas, propped up the market during the past week.

Market Analysis

Bears Growling on Harvest and Demand Challenges

October 22, 2017

Although current trading activity represents a bearish price outlook, Dr. O.A. Cleveland still believes the 65 cent price support will hold. . .even though more experts are abandoning that position.

Market Analysis

Shurley: October Numbers Not As Expected, But Prices Hold

October 18, 2017

USDA’s October production and supply and demand estimates are like apples – pick and choose and you’ll find some numbers you like...and some you won’t.

Around The Gin
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.

Product News

Monsanto Sets 2018 Crop Protection Incentives

December 5, 2017

Monsanto will provide multiple tools, resources and products to help cotton and soybean growers maximize weed control in 2018.

Product News

Praxidyn’s Mixmate Named a 2018 AE50 Award Winner

November 27, 2017

The American Society of Agricultural and Biological Engineers has recognized Praxidyn's Mixmate portable ag chemical blending and recordkeeping system with a 2018 AE50 award.

Product News

Bayer Looking for FiberMax One Ton Club Growers for 2017

November 16, 2017

Cotton growers who produce an average of 2,000 lb/A on 20 or more acres planted to FiberMax varieties in 2017 are eligible to be part of the 13th annual FiberMax One Ton Club.

Product News

Monsanto Delays NemaStrike for Additional Review

November 2, 2017

After finding cases of skin irritation, Monsanto is pulling its nematode seed treatment NemaStrike for further product review.

Product News

Intrepid Trio: Naturally Balanced Nutrition in Every Granule

November 1, 2017

Intrepid Trio contains three essential nutrients for cotton plants.

Product News

Save Time, Increase Efficiencies with Mixmate

November 1, 2017

Mixmate from Praxidyn is a precision chemical mixing system for small farms to large enterprises.

Latest News
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.

Market Analysis

Shurley: Demand Is Key to Price Strength and Stability

November 21, 2017

Demand is the key to cotton's future. We still have a way to go, but the outlook has certainly improved.

Market Analysis

U.S. Sales Booming to Meet Bullish Demand

November 17, 2017

Cotton appears to be caught in a battle between supply and supply. And that keeps prices well positioned to stay where they are.

Market Analysis

Increased Cotton Demand Moving the Market

November 11, 2017

A bullish supply demand report for November proves that demand moves markets. And demand for cotton has resurfaced.

Market Analysis

Cleveland: Yields, Quality, Consumption Still Rising

November 4, 2017

Reports of high yields, premium quality and growing consumption are keeping prices at the higher end of the trading range.

Market Analysis

India and Frost Combine to Prop Up Market

October 27, 2017

India’s plan to keep more of its cotton for domestic use, plus a potential freeze in West Texas, propped up the market during the past week.

Market Analysis

Bears Growling on Harvest and Demand Challenges

October 22, 2017

Although current trading activity represents a bearish price outlook, Dr. O.A. Cleveland still believes the 65 cent price support will hold. . .even though more experts are abandoning that position.

Market Analysis

Shurley: October Numbers Not As Expected, But Prices Hold

October 18, 2017

USDA’s October production and supply and demand estimates are like apples – pick and choose and you’ll find some numbers you like...and some you won’t.

Market Analysis

Trying to Read the Market: Bearish, Neutral or Bullish?

October 13, 2017

After finding USDA’s October WASDE report initially bearish and somewhat neutral, cotton prices went mildly bullish thinking about stronger demand and the real size of the U.S. and foreign crops.

Market Analysis

Examining Loan Program and Rate Changes for 2017

October 9, 2017

Dr. Don Shurley provides an analysis of what changes in the marketing assistance loan for 2017 could mean for cotton growers.

Market Analysis

Prices Still Sideways as Bearish Moods Grow

October 6, 2017

The market is watching weather and waiting for USDA’s October report. But bearish signs are starting to surface in some segments.

Market Analysis

Cleveland: Market in Hang On and Wait Mode

October 1, 2017

Cotton prices are holding without clear direction right now, as the market continues to watch USDA projections and harvest conditions for answers.

Market Analysis

Lower Chinese Stocks, Higher Polyester Prices Offer Market Hope

September 22, 2017

The market is holding steady, thanks again to China. Their Reserve auction has reduced cotton stocks and bumped consumption. And now, polyester prices are rising as the Chinese trim production.

Market Analysis

USDA Spins Market with Record Supply-to-Use Ratio

September 15, 2017

Hurricanes were but a mere hiccup for the world and U.S. crops. Instead, USDA spun some record-setting numbers that left the market dizzy.