Mumbai (Commodities Control Bureau) – ICE cotton futures closed the truncated week on a weaker note with a 47 points drop, as compared with 64 points loss last week. Greater part of the week was dictated by demand worries over simmering U.S-China tensions.
Weather concerns in U.S cotton belt, technical short covering and downward revision in India’s cotton output estimate were some bullish factors supporting cotton prices on the lower side.
On Friday, most active July contract on ICE futures dropped to a near three-week low, ahead of a U.S. response to new Chinese national security legislation for Hong Kong in a potential increase in tensions that could hamper Chinese buying of the natural fiber.
The cotton market overcame triple-digit losses Friday to close nearly flat. Into the close, traders bought back their some short positions to square up their positions.
Cotton contracts for July ended at 57.59 cents, up 2 points. It traded within a range of 56.56- its lowest since May 12, and 57.73 cents a lb. October Cotton closed at 57.27, up 7 points. July-October spread stood at 14 points vs inverted 10 points last week.
President Donald Trump announced Friday that the United States will cut ties with the World Health Organization. However before the press conference, uncertainty weighed heavily on the cotton market. Market was nervous about additional tariffs or sanctions being suggested or imposed in this PC, which could have been negative for the cotton market.
The United States has been highly critical of China's handling of the Hong Kong situation with Trump saying Washington would react "very strongly" against the attempt to gain more control over the former British colony.
Despite all the demand-related negative news and updates, cotton prices managed to hold itself firmly over 55 cents.
Tuesday, beginning of the holiday-shortened week, was the best of all with double digit gains by the closing bell. Cotton contracts for July rose 69 points at 58.30 cents per lb. It traded within a range of 57.66 and 59.45 cents a lb.
Some parts of south Texas remains inordinately dry. The most recent forecast has the Texas panhandle with above normal temperatures, but central Texas and Georgia carry below normal readings.
Also supporting the market, were hopes for a potential coronavirus vaccine and a pick-up business activity as economies reopen.
Additionally, CAI raised its forecast for India's cotton exports by 5 Lk bales to 47 Lk Bales on Monday as a fall in the value of the rupee to record low made shipments competitive. The trade body also reduced output estimates by 7% to 330 lk bales.
Wednesday saw cotton markets range bound on weather concerns in U.S cotton belt and U.S-China tensions. Cotton contracts for July settled up 11 points at 58.34 cents per lb.
Major Cotton growing areas in the United States are going through a dry spell, posing a threat to cotton crops. The NASS weekly update to crop progress showed that 53% of the 2020/21 crop was planted as of May 24.
Further weighing on U.S. cotton, was the possibility of rising supply in the world market from India, at more competitive prices driven by a record slide in the rupee.
Tensions between U.S and China pushed prices southward, as Cotton contracts for July ended 77 points lower, on Thursday, at 57.57 cents per lb.
There are concerns in the United States that China could switch to buying cotton from other countries at more competitive rates.
Meanwhile, major economies opening up after months long corona virus lockdown drove optimism among investors.
However, while that could drive an initial spike in retail sales, the impact of the lockdown will persist for cotton as consumer confidence dips to global financial crisis levels, Rabobank said in a note.
USDA’s holiday delayed Export Sales report noted 44,641 RBs of cotton sold on the week ending 05/21. That was down 65% wk/wk and 85% below the same week last MY. Of the week’s sales, 58,556 RBs were to China. China has committed to 3.172m RBs for the MY so far, which is 19% of the U.S. total 2019/20 cotton commits.
Total MY shipments were up to 11.08m RBs through week 43, which is 11% above last year’s pace, and 84% of last year’s total with 11 weeks left.
Meanwhile much price support for the week came via short covering and new buys. According to CFTC data for the week ended 26th May, managed money continued to cut their net shorts for 5th straight week 6859 contracts down from 9684 contracts from the week ended 19th May.
Meanwhile, open interest upped 6335 contracts at 238,330 contracts.
According to experts, cotton fundamentals remain extremely weak, with abundant cotton around the globe. This will sooner or later put pressure on physical prices.
Major economies will recover, but from very low levels, which is likely to take two or three years before getting back to 2019 consumption levels.
Experts advise downside protection via bearish options strategies in the December contract.
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