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Weekly: NY Cotton Extends Upward Rally, Finishes Above 90 Cents Level; Active Futures Seen Edging Higher

22 Feb 2021 7:27 am
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Mumbai (Commodities Control) – The ICE May cotton contract gained 261 points for the week ending Feb 19, finishing at 90.48 cents per lb; the May – July spread was little changed at 73. It is to be noted that, apart from ending the week above 90 cents level, May futures managed to reach out as high as 91.18 cents per lb during the week. The December futures finished near its weekly high, yet again, this time at 85.50 cents.

Last week NY Cotton extended its northward price rally, as the active May contract of ICE futures settled with over 5.5% of gains. During the week, the lead month of cotton futures touched the highest point of 88.75 cents per lb during 8th-12th February. Cotton #2 bounced back for the week ended 5th february when it settled with gains of 210 points.

During the latest week ICE cotton was higher, despite a continued slowing in export business, on likely further tightening to the domestic carryout estimate, continued strength in competing crops and bullish futures mechanics associated with on-call commitments. Not to forget the rising oil prices make synthetic fibers costlier, thereby making cotton, a competing natural fiber, more appealing.

Cotton prices edged higher on Friday, registering a third consecutive weekly rise as subdued U.S. dollar lent further support.

On Friday, Cotton contracts for May 21 Cotton closed at 90.48, up 18 points, having earlier hit a peak since June 2018 at 91.16 cents per lb. Mar 21 Cotton closed at 88.95, up 22 points. Jul 21 Cotton closed at 91.21, up 17 points and Dec 21 Cotton closed at 85.5, up 42 points.

In its weekly export sales report, the U.S. Department of Agriculture showed net sales of 119,500 running bales (RB) for 2020-2021, which includes sales of 44,100 RB to China. It reported exports of 311,800 RB were down 28% from the previous week, of which 82,300 RB were shipped to China, the biggest consumer of the fiber.

Over the weekend the U.S. dollar eased 0.2%, making greenback-denominated cotton less expensive for investors holding other currencies.

In the U.S, temperatures are expected to warm up over the coming week, especially across the cotton belt. Little precipitation is expected across West Texas over the coming week while cotton producing areas east of the region are expected to see significant rainfall. Meanwhile, the experts note that the latest classing data suggests that USDA may have overestimated 2020 production by as much as 500,000 bales.

The National Cotton Council (NCC) projected 2021 planted areas at 11.5M acres, as expected, and many believe acreage will be at least 12M acres. USDA projected 2021 domestic planted area and expected production significantly higher Vs NCC at 12M acres and 17.5M bales.

China was on holiday last week, so the market expects to see another round of slow export sales reported next week. Elsewhere, sowing across Brazil is off its normal pace, but is quickly racing toward a close. The state of Mato Grosso advanced more than 20 percentage points on the week to around 80% complete.

Meanwhile on the Indian cotton front, China's demand for Indian cotton has pushed the latter's yarn prices higher, according to India Ratings and Research. Accordingly, Indian yarn production increased in January 2021, led by a strong export and moderate domestic demand during December 2020. The rating agency points out that China's demand for Indian yarn resumed to pre-Covid levels during November-December 2020. This has resulted in substantial price rise in Indian cotton yarn prices.

Having said so, Indian high grade cotton continues to be in demand, at around 86-87 cents break-even, CIF China, resulting in a very attractive basis.

Meanwhile on the technical front, experts note that the trade is now at the mercy of speculators and index funds. The latter is seeing strong inflows, as commodity ETFs are becoming increasingly attractive amidst the inflation backdrop.

The weekly CoT report showed managed money was 68,568 contracts net long in cotton futures and options as of 16th February. Although long side positions fell by 293 contracts to 72,426 contracts, the short side collapsed for the second consecutive week, amid short covering, by 628 contracts to 3858 contracts this week.

Next week’s trading action will likely depend on movements in oil and equity markets, political news and US export sales and shipment data.

Producers have taken advantage of the rally in the December contract to forward contract cotton.

Experts advise pricing 50% of estimated yield at a futures price of 85 cents or higher and using options to price beyond 50%, given the likelihood of moves to or through the 90-cent level between now and planting season, continued volatility in competing crops, and the perpetual possibility of adverse planting conditions.

Analysts see support and resistance for Cotton #2 May contract at 88.06 cents and 92.83 cents per lb, respectively.

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