Mumbai (Commodities Control) – It was a roller coaster week for ICE cotton between 4th and 8th May as it managed end positive for 3rd week in a row. For the week ended 8th May, most active cotton contract gained nearly 43 points.
Cotton futures managed to stay in green on positive trade developments and Chinese purchases this week underscored hopes for greater demand from the top consumer.
On Friday, Cotton contracts for July rose 85 points at 56.24 cents per lb. It traded within a range of 55.39 and 57.05 cents a lb. October Cotton closed at 57.34 cents, up 67 points. July-October spread stands at 110 points, which at 140 points last week.
"China continuing to purchase U.S agricultural commodities is a good sign that they're going to follow through on their trade commitments and the market is looking forward to that continuing," said Bailey Thomen, cotton risk management associate with INTL FCStone, noting that positive rhetoric on the U.S.-China trade deal also helped the market.
Top U.S. and Chinese trade representatives played down deep differences over the economic wreckage of the coronavirus pandemic and said they would press ahead with implementing their "Phase 1" trade deal after an overnight phone call.
The United States Department of Agriculture's weekly export sales report released on Thursday showed net sales of 370,300 running bales (RBs) for 2019/2020 and included 217,500 RB from China, a large buyer of cotton.
However the week did not have positive factors for the first two days of the week. By their closing sessions on Monday and Tuesday, ICE cotton collectively lost 228 points weighed down by demand concerns from China on the backdrop of renewed trade war concerns between U.S-China.
Cotton planting progress was 18% complete in the US as of May 3rd. The 5-year average is 17% through the same time. TX was 21% planted and GA was 13%.
However the hopes of Chinese cotton demand and eventually the weekly export sales data on 7th May helped the fibre move up 181 points on Wednesday and Thursday.
Demand for cotton and apparel has been hammered by worldwide coronavirus restrictions, sending prices of the natural fibre tumbling 19% so far this year.
The U.S. economy in April recorded the steepest plunge in payrolls since the Great Depression, the starkest sign yet of how the novel coronavirus pandemic is battering the world's biggest economy.
"China buying has provided some excitement in recent weeks and rallied the market into the mid-to-high 50s," Peter Egli, director of risk management at British merchant Plexus Cotton, said in a note on Thursday.
"A lack of tenderable supplies might keep the July contract elevated, but once December takes over as the lead month, the market will have to face reality again."
According to CFTC data for the week ended 5th May, managed money slashed their net short position for 2nd straight week by 1119 contracts. Managed money was 19,143 contracts net short on May 5, close to levels seen for the weekend 8th October 2019.
Meanwhile, open interest upped 3892 contracts at 228,823 contracts.
Meanwhile International Cotton Advisory Committee (ICAC) has projected a bleak consumption outlook for the fibre crop in 2020-21.
ICAC projects cotton offtake is set to shrink by 11.8% as bleak economic conditions triggered by Covid-19 containment measures across the globe, coupled with unprecedented shifts in the labour market and growing unemployment have dented the consumption spirit.
While this bleak consumption outlook may push cotton growers away from the fibre crop, it will also put a pressure on the prices, which is estimated to average at 56.9 cents per pound for 2020-21 as against the average of 71.4 cents for 2019-20.
As a result, the global area under cotton is expected to decline in 2020-21 by 4% to 33 million hectares. Global production for the period is expected at 25 million tonnes, 4% lower from the current season due to a contraction in area. Cotton consumption for the year is expected at 23.2 million tonnes.
Global clothing retailers are on the brink of bankruptcy. This week saw J.Crew and Neiman Marcus filed for bankruptcy. Lord & Taylor is closing its stores, while JC Penney and Land’s End are rumored to be next. These closings will cause even more disruptions along an already battered supply chain.
Experts advise traders to avoid the July contract altogether or use options only to trade it. They add that the market will eventually trade to a new low, which could be at some point during the 2020/21-season.
Next week, the market will see planting progress on Monday. Then on Tuesday, USDA will issue its supply-demand numbers for May.
(Commodities Control Bureau)
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