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Weekly: ICE cotton settles week lower; weather worries to guide future move

6 Aug 2022 7:21 pm
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Mumbai, 6 Aug (Commoditiescontrol): ICE cotton futures edged lower for the week ended Friday, 5th August, even as weather concerns are threatening crops across growing regions.

In fact, buoyed by lingering crop condition concerns due to hot, dry conditions in key growing areas, ICE cotton futures bounced as much as 3% on Friday, to mark their best one-day gain in more than a week. However, that fail to provide enough support for December contract the week on a positive note.

ICE December closed Friday's session at 96.13 cents, up 1.51 cents, but it was down 0.61 cent on the week and month. Yet, the contract is 3.48 cents higher on the year. December has been trending sideways for the last 14 sessions, meandering in a relatively narrow range of just 663 points, between 90.89 and 97.52 cents.

March 2023 finished at 93.80 cents, up 1.47 cents and July 2023 settled at 90.43 cents, 1.51 cents higher; estimated volume was 16,492 contracts. Total futures market volume fell by 4,695 to 8,722 lots. Data showed total open interest fell 907 to 187,179 contracts in the previous session.

Volume has been reasonably slow, averaging only 18,500 contracts during the above time period. However, open interest has been increasing steadily, moving up from 177,500 to 188,100 contracts, as speculators are no longer in liquidation mode and we are seeing some buyers return.

Adverse weather conditions played out positively for cotton over the week-end. Thursday NOAA updated its Weekly U.S. Drought Monitor to show slight improvements for the Texas Panhandle, but it went on to worsen the drought conditions of West Texas. In addition, there was heavy flooding reported in Pakistan. A weather system dumped copious amounts of rain across it northern provinces in late July, but traders are unsure of what damage, if any, occurred on any crops.

USDA Crop Progress data showed 89% of cotton was squaring as of July 31 and 58% was setting bolls. The average pace would be 87% squared with 50% setting bolls. The updated six- to 10-day outlook for Texas indicates below-normal rainfall and above-normal temperature.

Loony weather system triggered short covering in agri-complex. Apart from this, the cotton complex was also benefited from outside influences as well. Rally in oil prices extended support. Oil prices advanced, potentially boosting appeal for cotton since that would make polyester, a substitute for cotton, more expensive.

Prices rose even though the dollar rallied across the board after a stronger-than-expected U.S. July payrolls report. A stronger greenback makes cotton more expensive for holders of other currencies.

Dollar found support in strong payroll data released on Friday. The Labor Department released an improved jobs report. Expectations called for 238,000 jobs, but the data was 528,000 new non-farm jobs. The better number gives the greenlight for the Federal Reserve to aggressively hike interest rates.

Investors are now looking ahead to the USDA's monthly World Agricultural and Supply Demand Estimates (WASDE) report due next week.

CFTC reported managed money firms as 31,829 contracts net long in cotton as of Aug 2. That was down 1,502 contracts from the prior week given net new spec selling. That left the group at their weakest net long since August of 2020. Commercial cotton traders added 6,668 new hedges, though the longs and shorts offset. The group was 55,735 contracts net short as of Aug 2.

The speculators are for all practical purposes may have ‘sold out’ their position, after they reduced their net long by over 10 million bales since last October.

US export sales for the week ending July 28 showed a negative 24,300 running bales for all three marketing years combined. There were cancellations of 132,400 running bales for the 2021/22-season that just ended, of which 100,400 bales were China and 21,000 Vietnam. In total there were just 11 markets buying, while shipments of 282,300 running bales went to 22 destinations.

With just 3 days of data left, total commitment for the 2021/22-season amount to 16.5 million statistical bales, of which 13.9 million bales have been exported. This compares to 17.5 million bales sold and 16.0 million shipped a year ago.

The Cotlook A Index (old crop) was 40 points weaker to 112.85 cents on Aug 4. USDA’s AWP for cotton dropped 15.04 cents to 89.44 cents/lb.

To conclude, Cotton is a two-edged sword, because on the one hand it needs to defend its acreage against other ag commodities and faces higher production costs, but on the other had textiles are not as essential as food, as consumers could easily wear their existing wardrobes for a few more years if needed.

Signals from the yarn market are not encouraging at the moment, as demand is sluggish and mills still have to digest a lot of high-priced cotton. However, the supply side seems to be struggling as well, as major crops like the US, India, Brazil and Pakistan are not likely to meet earlier expectations.

The market is therefore trying to establish how the balance sheet for the coming season is shaping up. It is likely that production is somewhere near 117 million bales at this point, while mill use is probably at no more than 114-115 million bales. Nevertheless, the amount of unsold cotton is relatively tight, especially when it comes to machine picked high grades. Therefore not much price pressure are expected at current levels.

The market is moving sideways in low volume, stuck between supply side/inflation bulls and recession bears, analysts say. Considering, the late recovery in prices, the complex may not witness much selling pressure at the moment and with 8.9 million bales in unfixed on-call sales for this season, of which 6.0 million are on December, we have a decent layer of underlying support.

While a slow global economy and an uncertain geopolitical situation have the potential to unsettle financial markets again, it is likely that cotton has taken enough of a beating for now and a sideways to slightly higher trend is possible in the foreseeable future.

ICE Dec'22 contract will find support at 94.39 cents and meet resistance near 97.69 cents.

(By Commoditiescontrol Bureau: +91-22-40015505)

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