Still Optimistic, but Fundamentals Do Rule the Market
February 3, 2018 Slice it, dice it or spice it, crow has a certain taste that only the few who have eaten it recognize its distinct flavor.
I thought I had gotten the taste out of my mouth earlier in the week, but it seems I will taste it all weekend. If you are unsure whether I have received any, trust me, FedEx has worn a path through my yard. I am sure the postal employees will rut it out this weekend with Amazon deliveries.
So, what went wrong?
First, obviously my market analysis! Rather, as one reader correctly pointed out, it was my enthusiasm. The fundamentals remain the same. The price correction was overdue – I just allowed my emotions to get the best of me. The simple ole fundamentals of supply and demand do rule the day, and the market will return to trade the very upper 70s and low 80s, basis the old crop March, May and July contracts. At least the new crop December contract maintained the mid-70 cent level.
While some Indian cotton is finally coming to the market, the U.S. continues as the principal supplier of old crop cotton to the world’s textile mills. This will continue to support the market retracement to higher prices. Nevertheless, the market volatility will continue due to the imbalance of on-call sales versus on-call purchases.
First certificated stocks are limited, and will be due to the low volume of certificatable stocks. But that only offers minor support. First notice day for the March contract is February 22. The principal support will come from demand and mill on-call sales.
Demand remains solid, and the price selloff was very supportive as mills took advantage of lower prices they thought had passed them by. Some 23 countries were buyers of U.S. cotton on the week. That is highly unusual. Typically, the most – even during the very best weeks – is 22. More than that, it amplifies the realization that the world must come to the U.S. for its cotton.
Too, the big U.S. crop with its abnormal supply of low grades and consequently low-priced cotton, is encouraging demand as it expands the export market for U.S. cotton. This week’s net sales totaled a very bullish 344,800 RB, with upland sales reaching 303,300 RB, Pima 9,500 RB, 2018-19 crop sales of 30,700 RB of upland and 1,300 RB of Pima. The primary buyers were Vietnam, China, Turkey, Indonesia and Taiwan.
The past week’s sell off uncovered even more demand. Export shipments on the week were very aggressive, totaling 305,100 RB of upland and 12,800 RB of Pima. China, Turkey and Vietnam were the primary destinations.
For one of the first time in weeks, mill on-call sales did not set a new record. However, the on-call sales position still provides a very bullish undertone to the market. Mills were very active in fixing the price of prior purchases, as nearly one million bales were fixed on the March contract. Yet, unfixed on-call sales based on both the May and July contracts continued to increase. Unfixed positions on the May contract are very bullish as on-call sales (buying futures) represent 3,722,200 bales, while on-call purchases (selling futures) for May are only 115,100 bales. Thus, the buying of May futures contracts dwarfs the needs of selling the May futures contract.
Likewise, on-call sales (buying futures) on the July contract are 4,099,400 bales versus the on-call purchases (selling futures) of only 314,500 bales. These disproportionate ratios of buying versus selling futures contracts will prove to be very supportive of prices.
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