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Weekly: ICE cotton suffer from bearish general macro set-up; Future remains uncertain for now

17 Sep 2022 3:23 pm
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Mumbai, 17 Sep (Commoditiescontrol): For the ICE raw cotton futures, it was a rather uncertain week of trade, with prices moving up one day and returning lower the next day as traders remain busy guessing which factor will influence the most - the fundamental factors or the currency movement.

In fundamental, the drag and pull was offered by demand and supply prospect across the globe, while the dollar scaling to 20-year high along with expectation of largest interest rate hike by the Federal Reserve emerged as major factor to decide the natural fibers future.

Slowly but surely most of these factors were building in to the prices. As a result, on Friday's session cotton futures traded limit down. The largest U.S. rate hike next week, poor CPI data, and slowing China demand ensured limit-down offered as far out as the July 2023 contract.

The ICE Cotton contracts for December closed at 99.29, down 400, March 23 finished at 96.15, minus 400 points, and July 23 settled at 90.84, 400 lower. Friday's estimated volume was 19,608 contracts.

The December contract hit its lowest since Aug 10, slipping below the round figure of 100 cents for the first time since the same date. The contract was also down about 5.3% for the week, its second weekly decline in the last three.

The cotton market "is worried that there's a cutback in world demand coming, that there will be a slowdown in the world economy and people will buy less clothing, dealers said.

The dollar firmed near recent 20-year highs, as markets braced for aggressive U.S. interest rate hikes in a bid to tame inflation, making cotton more expensive for buyers holding other currencies. A profit warning from delivery firm FedEx spooked investors already concerned about aggressive rate hikes.

Earlier in the week, the much anticipated WASDE report came in on the bearish side, showing a bigger US crop, almost equal global production and mill use, and higher US and global ending stocks.

US planted acreage rose from 12.48 million to 13.79 million acres, while harvested acreage increased from 7.13 to 7.88 million acres. Yield was three pounds lighter at 843 pounds, which resulted in a crop of 13.83 million bales, or 1.26 million bales more than a month ago. US exports increased by 0.6 million bales to 12.6 million, which gave us higher US ending stocks of 2.7 million bales, up 0.9 million from last month.

While the US crop estimate was too low last month, the USDA seem overshooting the target. A number in the low 13s is more realistic, given the recent setbacks in the Midsouth and Southeast, where excessive rain has caused boll rot.

Global numbers showed production at 118.45 million bales (+1.44 million) and mill use at a nearly identical 118.63 million bales (-0.46 million), resulting in a jump in ending stocks of around two million bales to 84.75 million bales. Even though the USDA has finally started to address its mill use number, it remains overstated in our opinion. Mills are still sitting on yarn and cotton inventory and are running significantly below their normal pace. Therefore, the global mill use could see further cut as the evidence of slower consumption mounts.

Elsewhere, tight liquidity conditions pushed Brazilian cotton prices lower to mid-August level, and deals were closed only when purchasers had urgent needs. Agents reported difficulties to match price and quality in the spot market, and some of them focused on delivering/receiving the product previously purchased. That's bearish for cotton markets as lower Brazilian cotton prices opens up another stream of cheaper source for global cotton markets.

Between August 31st and September 15th, the Brazilian cotton Index dropped by 8%, to BRL 6.1725/pound on Sept. 15th – the lowest since August 16th, 2022 (BRL 6.2962/pound).

Conab released new estimates for the Brazilian 2021/22 crop of cotton. The national area allocated to cotton crops is forecast at 1.6 million hectares, stable compared to that estimated in August (-0.04%) but 16.8% larger than that in the 2020/21 season.

Productivity estimates were revised down by 6.63% from that forecast last month and by 7.3% from that last season, to 1,596 kg/hectares. Thus, the Brazilian cotton output is forecast to be 8.3% higher than that in the 2020/21 crop, totaling 2.55 million tons, however, this amount is 6.68% lower than that estimated in August.

A look at the rest of the world (ROW) numbers suggest production surplus of 9.32 million bales, which is supposed to be absorbed by Chinese imports of 9.0 million bales. Last season they amounted to 7.84 million bales and China is currently buying at a much slower pace. With Chinese prices still about ten cents below US prices, it doesn’t make sense for China to import that much cotton from the ROW.

After a delay of four-weeks, the U.S. weekly Export Sales data was released. The report showed 100,261 RBs of cotton was sold during the week that ended Sept 8. Cotton exports reached 1.405m RBs through Sept 8.

Total commitments for the current season are now at 8.3 million statistical bales, of which 1.45 million bales have so far been exported. These numbers compare to 6.65 million bales in sales and 1.25 million bales shipped a year ago. Assuming that exports will amount to 12.6 million statistical bales for the season as estimated by the USDA, weekly shipments will have to average only about 240,000 statistical bales, which seems very doable.

The CFTC on-call report still showed 9.94 million in unfixed sales for the December to July contracts, of which 5.37 are on December alone. These numbers are not quite as dramatic as a year ago, when 14.64 million were open for the same period. The Commitment of Traders report had cotton speculator traders at 48,133 contracts net long as of September 13. That was a 1,976 smaller long than the previous week.

The Cotlook A Index was back up to 121.25 cents for Sept 15 after a 40 cent increase. ICE maintained 4,552 certified stocks for Sept 14, while USDA lifted the AWP for cotton by 25 points to 95.17 cents.

Monday afternoon, USDA will issue its weekly Crop Progress and condition numbers. The "bolls open" category will be keenly noticed. With hot and dry weather dominating the next two weeks, more cotton may be susceptible to loss if a major weather event hits the Southeastern United States.

Traders are torn between a supportive US supply situation and a weak global demand picture. Although the US crop was revised higher by the USDA, field reports are not encouraging, as parts of the Midsouth and Southeast have received too much rain in recent weeks and are dealing with problems such as boll rot and boll lock, which have taken another bite out of the US crop’s potential, analysts said.

Barring any tropical systems heading into cotton areas, the weather forecast calls for warmer and drier conditions across the cotton belt over the next two weeks, which would help in getting the crops ready for harvest. Statistically the US balance sheet looks tight, but if the global demand situation doesn’t improve, it won’t be enough to move prices higher.

However, the above assessment does not provide enough evidence on prices movement. Traders should exercise caution while taking short position since it won’t take much to ignite another rally, as there is plenty of fuel in the form of mill fixations and speculators waiting in the wings.

For Monday, support for December cotton is at 97.96 cents and 96.62 cents, with resistance at 101.96 cents and 104.62 cents.

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

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