Weekly: Technically ICE Cotton Under Sellers’ Control; Experts Advise Options Trade Amid Weak Consumption Signals

Since February 19, the May contract has lost close to 1000 points. Looking at the technical charts, it is evident that sellers have the market within their grip. In its weekly update, the CFTC showed managed money had flipped the position from net long to net short for cotton. Cotton speculative traders were 7,946 contracts short for the week ended 10th March. This change is the result of simultaneous long liquidation and net new selling.

Having said so, cotton market managed to settle higher on Friday. The fibre rose on Friday as expectations for more stimulus measures to counter the economic impact of the coronavirus provided investors a glimmer of hope following sharp sell-offs this week.

Cotton contract for May settled up 79 points at 60.49 cents per lb. The contract was up more than 3% earlier in the session. For the week, though, May cotton lost 230 points. On Friday, July Cotton closed at 60.76 cents, up 41 points. The May-July spread squeezed to 27 points, down from the spread last week at 72 points.

There's some optimism over President Donald Trump declaring a national emergency to help states deal with the coronavirus outbreak, said Sid Love, commodity trading adviser at Kansas-based Sid Love.

However cotton witnessed much damage from the beginning of the week along with other commodities and stock markets across the globe. Cotton contract on May crashed down 148 points at 61.31 cents per lb during the early and ended 158 points lower to 61.21 cents per lb. It traded within a range of 60.79 and 62.5 cents a lb.

Fibre slipped amid the panic surrounding drop in crude oil that plunged nearly 30% after Saudi Arab cuts prices. Oil fell by the most since 1991 on Monday after Saudi Arabia started a price war with Russia by slashing its selling prices and pledging to unleash its pent-up supply onto a market reeling from falling demand because of the coronavirus outbreak.

On Tuesday, cotton on ICE futures climbed back, as the United States Department of Agriculture (USDA) cut its estimates for domestic production and ending stocks for the 2019/20 marketing year.

Aided by rebound in financial markets and crude oil, fibre prices firmed on Tuesday. The most active cotton contract on ICE Futures the contract for May settled up 20 points to 61.41 cents per lb. July contract settled firm at 62.03 cents/lb, up 12 points.

USDA in its latest World Agriculture Supply and Demand Estimates (WASDE) report lowered its projection for U.S. production by 300,000 bales to 19.8 million bales, down 1.49% from Feb. However, the number is still 7.78% above the 2018/19 MY. U.S. ending stocks estimates were reduced by 300,000 bales to 5.1 million, the agency said.

The strength continued in Wednesday’s session, as Cotton contracts managed to settle 13 to 15 points higher by the closing session. Mill buying lend some support to the fibre, as May futures closed at 61.55 cents up 14 points. It traded within a range of 61.31 and 61.94 cents a lb. July contract settled closed at 62.16, up 13 points.

However, investor sentiment diminished after the World Health Organization classified the coronavirus outbreak as a pandemic, sending U.S. stock indexes more than 4% lower.

Meanwhile Thursday’s session came crashing down triple digits for cotton futures as concerns over the coronavirus outbreak overshadowed the United States Department of Agriculture (USDA) data.

The report showed net sales of cotton hit a fresh marketing year high. US net cotton sales were at 484,200 running bales (RB) - a marketing-year high- for the week ended March 5 in the marketing year 2019/2020, up 22% W/W and 62% from the prior 4-week average. US net cotton sales were at 395,500 RB for the week ended February 27. China’s been the destination for 11.67% of the total exports on the MY.

ICE cotton futures hit a 5-month low on Thursday in a broader markets sell-off after the United States imposed restrictions on travel from Europe that sparked demand fears. May Cotton ended at 59.7, down 185 points. While, July Cotton closed at 60.35 cents, down 181 points.

News that U.S. lawmakers and the White House were nearing an agreement on a coronavirus economic aid package helped U.S. stock indexes recoup some of the losses from its worst daily selloff in more than three decades.

However, consumption is an area of concern as USDA projected global cotton consumption in 2019/20 at 118.2 million bales, 2.1 million bales below last season. The projected decrease in world cotton mill use is mainly related to the expected impact of the COVID-19 on global economic activity that has seen the global cotton consumption estimate reduced 2 million bales since January; for the textile and apparel industry. For 2019/20, China’s mill use is projected at 36.5 million bales, 3 million bales below 2018/19 and the lowest in 4 years.

"Consumers are hunkering down, fearing for their health and worrying about jobs and evaporating portfolios. This does not bode well for cotton consumption over the coming months," said Peter Egli, director of risk management at British merchant Plexus Cotton, in a note.

On the production side, India and the United States are forecast higher— with Brazil unchanged in 2019/20. Production in India—the leading cotton producer in 2019/20—is forecast at 29.5 million bales, 14% above 2018/19.

As per the CFTC data for the week ended 10th March, the open interest stood at 257,124 contracts, up 15,390 contracts from the previous week.

Experts fear that the crisis will likely to deepen over the coming weeks. Hence it is a time to play safe and seek protection via options, despite attractive low level pricing.

An impending milestone for the cotton market stands to be USDA’s Planting Intentions report on March 30. Of course, the sharp decline in new crop’s prices could further reduce plantings as lenders are having a hard time making operating budgets profitably flow.

Support and Resistance for cotton #2 lies at 56.98 cents and 63.66 cents/lb, respectively.