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Weekly: ICE Cotton Tanks on Weak Exports Report, Sino-U.S. Tensions; Experts See Speculative Selling Ahead

26 Jul 2020 11:02 pm
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Mumbai (Commodities Control) – Cotton #2 gave up 184 points for the week ended 24th July. The most active December futures lost 2.97% during 20th-24th July. Last week, the fibre ended 237 points lower.

December Contract could gather a little over 100 points for the first two days of the week riding on the back of adverse crop conditions and speculative buying. However between 22nd and 24th July, most active cotton futures on ICE lost 285 points, primarily due to improved weather forecast and U.S.-China trade concerns.
The cotton market was sharply lower Friday, fearing further escalation of the U.S.-China political troubles. ICE cotton futures dipped more than 3% on Friday.

Cotton contracts for December fell 182 points to settle at 59.96 cents per lb, having earlier hit a low of 59.55, their lowest since June 29. March 21 Cotton closed at 60.82 cents, down 181 points. Dec’20-Mar’21 spread stood at 86 points vs 69 points in the prior week.

Earlier this week, the crop progress report showed 73% of cotton was squaring, and 27% of the crop was setting bolls as of July 19. That was 2 and 5 percentage points behind average respectively. Texas had been enduring triple-digits temperatures, with scant rain. Last week, the crop rating for Texas was 41% very poor to poor.

However, worsening trade relations between the U.S. and China has gripped the cotton market. Earlier this week, the U.S. ordered China to close its Houston, Texas, consulate because of suspicious espionage activities. Infuriated, overnight China ordered the U.S. to close its consulate office in Chengdu, China. Such angry seesaw diplomacy cast a bearish cloud on the cotton market, which was already fragile from Thursday’s cotton cancellations basis USDA’s weekly export -sales report.

Weak export sales data along with surging tensions between the U.S. and China is making the situation worse for cotton, said Bailey Thomen, cotton risk management associate with StoneX Group. "Investors are selling-off before the geo-political situation gets worse."

On Thursday, the U.S. Department of Agriculture's (USDA) weekly export sales report showed net sales reductions of 13,100 running bales and exports of 271,300 running bales, down 13% from the previous week.

Prices of natural fiber have declined nearly 15% this year on the back of the novel coronavirus pandemic that has hurt demand for apparels, while a diplomatic dispute between the United States and China has also weighed.

On Friday, China ordered the United States to close its consulate in the city of Chengdu, responding to a U.S. demand for China to close its Houston consulate.

"The fundamental picture continues to look bearish, as mills are well covered and most origins need to dispose of inventories before a new crop arrives," Peter Egli, director of risk management at British merchant Plexus Cotton, said in a note on Thursday.

"Add to this the slowing economic recovery due to a flare up in virus infections."

Another negative for the market was the easing of the weather concerns. The recent weather outlooks call for cooler and wetter action. Still, even with that potential change, it is hard to assess how much crop damage has already been infected to the Texas crop. The next supply/demand report is out on August 12.

Weather in cotton-growing regions such as west Texas have started to improve after a spell of dry, hot conditions threatened crop quality.

Near-average temperatures are expected in west Texas with isolated to scattered showers and thunderstorms across much of the area, the National Weather Service said in its daily bulletin though a tropical depression near Texas continues to pose a threat to the crop.

In CFTC’s weekly CoT report, cotton speculative traders extended their net longs by 556 contracts to 30,373 contracts for the week ended 21st July. That is the largest net long for managed money in 23 weeks. Managed money added 2220 contracts to their long postion whereas 1664 contract to their short postion indicating some of the managed money manager having bearish view for the market. The open interest for the week ended 21st July stood at 213,887 contracts, up 3447 contracts.

Meanwhile in India as on 24th July, area under kharif Cotton was registered at 118.03 lakh ha area against 96.35 lakh ha for the corresponding period last year (+22.5%).
India 2020-21 kharif crop sowing as on July 24 is up 18.5% at 799.95 lakh hectare as against 675.07 lakh hectare during the same period last year.
During the week, major domestic cotton markets in India were steady-to-weak due amid ‘near-to-nil’ arrivals, scattered mill buying and weak cues from global benchmark cotton.
Meanwhile, demand for Cotton Corporation of India’s (CCI) stock has risen amid declining farmers’ arrivals and shortage of quality stocks with the ginners. CCI’s daily cotton sales touched six- year highs on Tuesday amid rising demand. Sources at CCI reveal that the agency sold around 700,000 bales of cotton on Tuesday alone, this is the highest daily sales achieved by CCI since 2014.
China imported about 90,000 tonnes of cotton in June, M/M increase of 20,000 tonnes or 28.57%, and a YoY reduction of 67,500 tonnes or 42.86%. January-June imports totaled about 898,000 tonnes, a reduction of 278,300 tonnes from the corresponding period last year, according to data by China's General Administration of Customs.
Meanwhile flooding in the Hubei, Anhui, Hebei and Shandong provinces in China has mainly stuck to low lying fields. High lying fields have been partially stripped of nutrients from continued rainfall. Reports suggest less than 5% of China’s national cotton production will be adversely affected.
Experts, meanwhile, are cautiously bearish, as there is ample supply and uncertainity in pick up in demand in near term which will keep price depressed whereas a massive money printing and weak dollar may continue to act as countervaling force.

Support and Resistance for cotton #2 lies at 57.99- 59.04 cents and 61.62 - 63.15 cents per lb, respectively.

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