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

Was USDA Right? U.S. Crop Looking Bigger.

August 18, 2017

The U.S. crop is signaling that it is getting bigger. With nothing more than a good fall, the crop could climb as much as a million bales more than USDA’s August surprise estimate.

Market Analysis

USDA Report Stuns Market. Now, Wait for Reality.

August 14, 2017

USDA stunned the market with its August estimate of U.S. cotton production. But remember – history has shown consistent deviation between mid-summer estimates and final harvest realities.

Market Analysis

Technically Speaking, Pay Attention to Fundamentals

July 28, 2017

With prices holding in a three-cent range, it’s likely time to pay attention to what the market fundamentals and technicals are telling us.

Market Analysis

December Futures Prices? Ask Mother Nature.

July 23, 2017

Opinions differ on where December futures prices may go. But there’s no doubt that Mother Nature holds the key to forthcoming price activity.

Market Analysis

With Market Oversold, Is Bullish Return Near?

July 14, 2017

The cotton invert continues, as both the U.S. and Australian crops are oversold.

Market Analysis

Shurley: Prices Continue to Flounder in Lower Range

July 14, 2017

The July USDA crop production and supply and demand estimates report was not bad, but prices continue to show no improvement.

Market Analysis

Rain in India, U.S. Keeps Pressure on Prices

July 7, 2017

Beneficial rains in the U.S. and India kept pressure on cotton prices, as the December futures contract settled the past week unchanged.

Around The Gin
Product News

Maximizer Club Honors Top FiberMax Dryland Growers

August 17, 2017

The FiberMax Maximizer Club honored 121 growers who yielded at least 1,000 lb/A on dryland acres with FiberMax varieties in 2016.

Product News

Monsanto, Valent Expand Roundup Ready PLUS Partnership

August 7, 2017

Monsanto and Valent U.S.A. are expanding their crop protection partnership for the 2018 Roundup Ready PLUS Crop Management Solutions platform.

Product News

New Broadleaf Burndown Option Coming from Dow AgroSciences

July 31, 2017

A new burndown option for tough broadleaf weeds has shown excellent promise in trials across the Mid-South and Midwest.

Product News

Protect Cotton Potential from Weeds, Worms and Diseases

July 12, 2017

Southeast cotton producers say latest technologies from PhytoGen help protect yield and quality.

Product News

Monsanto “Troubled” by Arkansas Dicamba Decision

June 26, 2017

Monsanto has weighed in on the Arkansas Plant Board’s proposed ban of dicamba use in the state.

Product News

Drexel Adds Two Regional Sales Reps

June 16, 2017

Kyle Herring and David Davis have joined Drexel Chemical Company as regional sales representatives.

Product News

Dow AgroSciences Launching Enlist Corn in 2018

June 16, 2017

Following the launch of Enlist cotton, Dow AgroSciences will make Enlist corn commercially available for 2018 after receiving Chinese import approvals.

Product News

Transform Earns Section 18 Exemptions for Cotton, Sorghum

May 4, 2017

Transform WG insecticide has received Section 18 emergency use exemptions for use in cotton and sorghum in select states for the 2017 production season.

Latest News
Market Analysis

Was USDA Right? U.S. Crop Looking Bigger.

August 18, 2017

The U.S. crop is signaling that it is getting bigger. With nothing more than a good fall, the crop could climb as much as a million bales more than USDA’s August surprise estimate.

Market Analysis

Shurley: So Much for 18 Million Bales and Higher Prices

August 14, 2017

If USDA’s September numbers still validate a 20+ million bale crop, prices could slide. If not, the 68-70 cent level – or better – should hold.

Market Analysis

USDA Report Stuns Market. Now, Wait for Reality.

August 14, 2017

USDA stunned the market with its August estimate of U.S. cotton production. But remember – history has shown consistent deviation between mid-summer estimates and final harvest realities.

Market Analysis

Production, Weather Woes Boosting Market

August 4, 2017

Mother Nature’s recent Texas outburst was rough on cotton fields. But it was enough to boost prices back into the 70s.

Market Analysis

Technically Speaking, Pay Attention to Fundamentals

July 28, 2017

With prices holding in a three-cent range, it’s likely time to pay attention to what the market fundamentals and technicals are telling us.

Market Analysis

December Futures Prices? Ask Mother Nature.

July 23, 2017

Opinions differ on where December futures prices may go. But there’s no doubt that Mother Nature holds the key to forthcoming price activity.

Market Analysis

With Market Oversold, Is Bullish Return Near?

July 14, 2017

The cotton invert continues, as both the U.S. and Australian crops are oversold.

Market Analysis

Shurley: Prices Continue to Flounder in Lower Range

July 14, 2017

The July USDA crop production and supply and demand estimates report was not bad, but prices continue to show no improvement.

Market Analysis

Rain in India, U.S. Keeps Pressure on Prices

July 7, 2017

Beneficial rains in the U.S. and India kept pressure on cotton prices, as the December futures contract settled the past week unchanged.

Market Analysis

Shurley on Cotton: Where Did the Acres Go?

July 6, 2017

Dr. Don Shurley says the recent USDA Planted Acreage report did not deliver as expected, making times a bit confusing for producers looking to manage risk.

Market Analysis

Bulls Push Market on Heels of USDA Planting Report

July 5, 2017

Smaller than expected U.S. cotton plantings – and the potential smaller crop – caught the bulls’ attention in the market.

Market Analysis

Market Catching Its Breath After 10-Day Slide

June 23, 2017

After an unprecedented 10-day drop in prices, the market is trying to catch its breath.

Market Analysis

Mother Nature, Not Bulls, Managing the Market

June 16, 2017

Cotton prices took a big hit, and bullish signals are hard to find. Mother Nature is now in charge.

Market Analysis

Shurley: June Report Sends Mixed Signals

June 15, 2017

USDA’s June WASDE report contained some good news and some bad news. Overall, Dr. Don Shurley considers the report somewhat bearish.

Market Analysis

Report Softens Prices, Consumption Concerns Rise

June 9, 2017

USDA’s June WASDE report sent old crop and new crop prices lower at week’s end, as manmade fibers take aim at cotton.