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Weekly: ICE Cotton Marks Humble Recovery Amid Robust Exports Data; WASDE Report In Focus Next Week

9 Mar 2020 7:29 am
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Mumbai (Commodities Control) – ICE cotton manages to close higher by 2% higher for the week ended 6th March, after closing 11% lower in the previous week; biggest weekly percentage loss since mid-July 2011.

Although, ICE cotton futures fell over 1% on Friday, after a plunge in financial markets, with oil dropping over 7% and equities tumbling, as investors were unnerved by the rapid spread of the novel coronavirus outside China.

Cotton contracts for May settled down 56 points at 62.79 cents per lb. It traded within a range of 62.35 and 63.27 cents a lb. For the week, however, May picked up 130 points. July Cotton closed at 63.51, down 52 points. The May-July spread strengthened slightly at 72, close to the spread last week at 78 points.

It was a week of great potential for stronger price performance with the best export data release of the current marketing year and weakening US currency. However, coronavirus concerns and weakness in equity markets weighed upon cotton futures as the week wore on. Even Fed’s announcement of a half point rate cut, did not receive the much-anticipated enthusiasm.

"… The market is trying to figure out where to go from here, value has been found at these lower prices but it's relatively oversold," said Bailey Thomen, cotton risk management associate with INTL FCStone.

The number of people infected with the coronavirus across the world surpassed 100,000, sending the Dow Jones Industrials down by more than 500 points and oil prices down by more than 7%.

Cotton had a tough time choosing between virus threats and strongest export numbers for the marketing year.

US net export sales and shipment against 2019/20 were notably higher for the week ending Feb 27. The US is 90% committed and 45% shipped Vs the USDA’s export projection. Both sales and shipments were well ahead of the average weekly pace required to meet the USDA’s 16.5M bale export target. Sales against 2020/21 were lower at approximately 52K RBs; total gross new sales were in excess of 600K RBs. China was a net buyer over the period.

The week marked a gap-up opening as cotton futures rose as much as 4% on Monday, supported by mill buying and an uptick in risk sentiment, while a slide in the dollar added to the upbeat mood. Cotton contracts for May settled up 197 points, at 63.46 cents per lb., after hitting over a four-month low in the previous session.

Equity markets around the world surged as the prospect for central banks cutting interest rates, to soften the economic blow of the coronavirus, heartened investors.

However the euphoria was short-lived, as Cotton prices on the Intercontinental Exchange ended down on Tuesday, tracking weaker equity markets.Dow Jones ended down by 785 points on renewed fears that the coronavirus will lead to a global economic slowdown even as the U.S. Federal Reserve cut interest rates to help cushion the impact.

The most active May cotton contract ended down 61 points at 62.77 cents per lb.

Markets opened on the positive note on Tuesday and rising more than 3% at one point of time on the expectation of rate cut. Weaker dollar and mill buying also supported the market. But the market gave all the gains and closed in red tracking sharp fall in Dow Jones index.

Came Wednesday and Cotton futures rose again by 2%, helped by mill buying and a recovery in stock markets, while investors awaited weekly federal export sales data from the U.S. Department of Agriculture. Cotton contracts for May rose 25 points to settle at 63.02 cents per lb, trading within a range of 62.87 and 64.05 cents a lb. July Cotton closed at 63.72, up 16 points.

Meanwhile, Cotton Corporation of India has commenced auctioning part of its old cotton stock at discounted rates. CCI commenced discount offers to the tune of Rs 3200-4400/candy, on bulk buys of cotton. The discount scheme is applicable for purchase of cotton pertaining to crop year 2018-19 for the sales made from 2nd March 2020 to 30th April 2020.

ICE cotton futures rose on Thursday, propelled by strong U.S. export sales data, but the rapid spread of coronavirus around the world and its impact on demand for the natural fiber kept prices in check. Weakness in Financial markets kept a lid on cotton’s price gains. The fact that the Dow Jones was by plummeted some 900 points, kept cotton from rising freely.

Cotton futures trading pushed the front months up by 37 to 56 points. May Cotton closed at 63.35, up 37 points. It traded within a range of 62.72 and 64.15 cents a lb. July Cotton settled at 64.03, up 36 points.

Cotton exports added 478,193 RBs on the week for a MYTD total of 7.046 million RBs. That is 23.4% above last year’s pace. Cotton sales to China were 58,448 RBs, or 14.8% of the total. China was also the destination for 15.3% of the week’s shipments. MYTD cotton shipments to China are 816,696 RBs, which is 36% higher than last year’s pace.

Last month, the USDA projected U.S. cotton plantings at 12.5 million acres in 2020, lower than the 13.74 million acres projected for the 2019/20 marketing year.

"There is fundamental support under the cotton market," said Sid Love, commodity trading adviser at Kansas-based Sid Love Consulting, adding that the concerns over the virus also offset limited support from a projected drop in cotton acreage in the United States.

"In the short run it (the coronavirus) could slow exports, but I think overall they are going to pick up one way or another."

Meanwhile, the Cotton Association of India (CAI) in its February estimate, has retained its cotton crop estimate for the season 2019-20 beginning from 1st October 2019 at 354.50 lakh bales of 170 kgs each i.e. at the same level as in the previous estimate.

The weekly Commitment of Traders report showed that managed money traders reduced their net long position by 17,789 contracts. So cotton speculative traders were 4,612 contracts net long for the week ending 3rd March.

For the week, managed money dropped 8957 longs, while 8832 contracts were added on the short side. The open interest for the week ended 3rd March stood at 241, 734 contracts, up 19,134 contracts from the previous week.

Experts note Coronavirus to be a major concern. With the pandemic now present in nearly hundred countries, the global economy is starting to take a hit.

Next week’s USDA report will give a new peek into the supply situation. The sharp fall in both energies and equities is providing a massive headwind to commodities, but China’s granting of duty-free import licenses could soon result in phase one buying.

Having said so, market analysts find cotton quite attractive from a fundamental perspective, at the current levels. US cotton is selling out fast and most of it is likely to be committed by mid-year. With India’s cotton priced higher, there is room for prices to rise in. However, demand side of the story is equally crucial with the threat of economic slowdown lingering. Participants are advised to be prepared for Extreme volatility.

Support and Resistance for Cotton #2 lies at 61.88 cents and 673.72 cents/lb, respectively.

(Commodities Control Bureau)

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