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Weekly: NY Cotton Rides Higher Amid Strong Technicals, Global Output Concerns; Experts Set Higher Targets Ahead

26 Oct 2020 8:17 am
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Mumbai (commodities control) – NY Cotton posted its third weekly gain, despite ICE cotton futures settling lower on Friday. For the week-ended 23rd October, the fibre ended 1.86% or 131 points higher for March’21 futures on ICE, while December Futures settled 1.96% or 137 points higher. For the week ended 16th October, the most-active ICE cotton futures jumped 3.13% higher.

Numerous bullish factors continue to push cotton futures higher. Positive money flows into commodities by speculative action and index funds, smaller than expected crops in the US and India, better than expected near-term demand; pent-up demand and restocking and robust performance in grains and oilseeds.

Another factor fuelling cotton’s northward price rally is a robust technical picture.CFTC data showed managed money’s net long increased 5,253 contracts to 65,195 contracts on 20th October. This is the result of simultaneous addition to the long side positions by 5,070 contracts, whilst shortside dropped by 183 contracts to 3,185 contracts. The open interest upped to 292,619 contracts.
Having said so, on Friday investors booked profits after strong gains in the last session.
The cotton contract for December closed at 71.29, down 65 points. The front-month contract jumped over 1% in the previous session, just shy of a near 1-1/2-year peak of 72.13 cents scaled on Wednesday. March 21 Cotton closed at 71.87 cents, down 64 points. Dec’20-Mar’21 spread stood at 58 points vs 64 points last week.
Cotton futures started the week on 9-months’ high, stretching to 1.5 years’ top close to 72.80 cents per lb on Wednesday.
This week, the U.S. Department of Agriculture's weekly crop progress data on Monday showed that 34% of cotton was harvested in the United States as of the week ended Oct. 18, up from 26% in the preceding week. The report also showed 40% of cotton was in good/excellent condition, unchanged from the preceding week.
The U.S. Department of Agriculture marginally lowered its U.S. production estimate to 17.05 million bales in October, but market experts expect the final crop to be lower than that.

Thursday's weekly export sales report showed an improvement in demand with net sales of 227,800 running bales (RB) for 2020/2021.
Experts believe that the market has done a great deal over the last couple of weeks, and technically it does need a pullback, but the likelihood of falling below 69 cents again are negligible.

Certificated cotton stocks deliverable as of Oct. 22 totaled 33,731 480-lb bales, up from 33,477 in the previous session.
Next Monday, USDA will offer up its crop progress numbers concerning conditions and harvesting efforts. Market believes, once the crop becomes 50%-plus gathered, the government will halt its condition reporting. Since the harvest was 34% last week, it's suspected that it would fall about Nov. 2.

"The outlook for cotton has improved in recent weeks due to rising production risks alongside a stronger export outlook," Goldman Sachs said in a note. "With the global supply outlook tightening, we see world cotton stocks being run down over the next year and a cyclical rise in prices, forecasting 73, 74 and 78 cents per pound over the 3, 6 and 12 month horizon."
According to Jon Marcus of Lakefront futures & Options Brokerage, "Everything corrected probably quicker than thought and countries are stockpiling after realizing prices are in favor now. To see this market move into the 80-90 cents range is not out of the question, especially if the USDA's forecasts of the output do shrink."
Not to forget, China plans to purchase around 500,000 tonnes of cotton from its Xinjiang region for state reserves following last month's report that the U.S. was weighing a ban on cotton from Xinjiang and as China has ordered mills to stop buying Australian cotton.

The trade spat between China and Australia, which began in barley, has moved to cotton as China told importers to source cotton elsewhere. There has been no official ban or tariff imposed, but the verbal commands apply to both cotton and coal from Australia.

Having said so, experts advise to exercise caution hereon, as they believe that instead of booking profits, longs might add to their positions, which would put the trade into a dangerous position. For December futures, they add, chances of strong short-covering rally will be higher, in the absence of sell-side liquidity.

Indian-side of Cotton-- Spot prices were robust for North Indian and Rajasthan cotton mandis until mid-week. Barring M.P mandis, where mill buying was weak throughout the week affecting arrivals and keeping prices range-bound, most of the other cotton mandis were quoted strong-to-steady. Trade thinned over the weekend on account of Dussehra.
Cotton prices slipped in the second half of the week, due to reduced mill-buying at elevated prices. Traders expect arrivals to rise in most of the mandis in anticipation of robust procurement by Cotton Corp. at MSP.
Support and resistance for Cotton #2 lies at 71.26 cents and 72.76 cents per lb, respectively.

(Commodities Control Bureau)

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