US Cotton Weekly: Bulls Have The Upper Hand; Prices Can Rally To 90 Cents

MUMBAI(Commoditiescontrol): The US cotton futures maintained bull trend for the third consecutive week taking the May contract to near 10 month high post dual bullish USDA report.

The benchmark May contract settled at 84.52 cents/lb on Friday, surging 3% over the week. Open interest as of March 8 showed 129,782 lots outstanding, marginally lower 0.6% from prior week at 129,782 lots. Total open interest for all contract rose 1.4% over the week to 269,244 lots.

The strong weekly export sales and 12 year high shipments fed the bulls and the WASDE report bringing in upward revision to export estimates at 14.8 million bales(480lb) rallied prices to 10 month high on Thursday. (Full Report)

The market was in total control of the bulls right after the explosive weekly export sales report where the weekly shipments hit a record 12 year high at 551,244 Running Bales(RB) while sales were above expectations at 392,887 RB. (Full Report)

Since the beginning of the season, the tug of war between trade shorts and spec long was building up with the first phase battled out during the first two weeks of February. The trade shorts were the winners as most spec longs exited their position after the stock market plunged as Dow Jones fell by 2,757 points from record highs to 23,860 on February 8.

But, it looks like the spec longs are getting back into the tug of war and this time prices have shot up to near 10 month high at 86.6 cents on continuous chart at an earlier phase compared to last season when it shot up to synthetic high of 88.14 cents/lb on May 15. The 86.6 cents now acts as the strong key resistance and if breached then rally could persist to 90 or even 97 cents as per technical ideas.

The bull driving force is the large outstanding on-call sales and upwards revised export estimates to 14.8 million bales(480lb) this season. The surprising factor is that the next season December contract has large on-call sales position standing in the current period, estimated large export shipments carryover and lower production due to drought conditions in Texas. Hence, prices of December will likely trade strong unless a big bearish factor brings in the much-needed liquidation to fall below 70 cents/lb.

The on-call sales position, as of March 1, showed 14.98 million bales(480lb), up 5.6% from prior week at 14.2 million bales. The May contract saw mills fixing their outstanding position as on-call sales dropped 1.9% to 3.3 million bales(480 lb), while July increased 4.3% to 4.5 million bales.



Further, the on-call sales in new crop December 2018 was quite large at 3.2 million bales compared to corresponding period last year where new crop December 2017 position stood at 1.85 million bales. This means there is a large trade short position created by the merchants on the futures bourse to act as a counter hedge until the mills fix their on-call sale price which usually happens when prices fall and is cheaper to fix for the mills.

The December 2018 contract closed at 78.72 cents/lb recording fresh contract highs on March 9.

The CFTC report, dated March 6, showed money managed players increasing their position by 15%, over the week, to 82,339 lots and 24.5% from previous lows at 66,146 lots. On the other hand, the trade shorts rose 8% to 173,127 lots.

The market has fallen into the curse of lacking sell liquidity and the trade shorts are in trouble as there is a lot of bullish factors feeding on the bulls. Spec longs still have room to add in more net long position hence the probability of prices crossing 90 cents/lb is high at present.

If prices go much higher it might lead to some buybacks or cancellations, but we don’t see that as a threat just yet. And even if some cotton were to get freed up again, it would only cover a small portion of the short position that exists at the moment.

“It will take a lot more than 87,000 bales of certified stock to change the mindset of the market. During the March 2008 squeeze the certified stock amounted to 600k, but that wasn’t enough to stop the bullish dynamics that were in place”, comments Peter Egli, cotton expert from UK based Plexus group.



Technical Ideas(May): Key resistance is placed at 86.60 and during the week prices have reversed from intraday highs on profit booking hence further rally is seen after prices breach 86.6. Traders long and holding the same can revise up the stop loss to 80. Resistance will be at 86.84-86.60 and Support will be at 84.28-81.95. Higher range of 86.64-91.73 can be used to take profits.

(By Commoditiescontrol Bureau; +91-22-40015534)