Cotton Weekly: Large World Ending Stock For 2017-18 Diminishing Upside In Prices

MUMBAI(Commoditiescontrol)- The US cotton market set a trend on the world cotton prices which trended bearish for the fourth consecutive week.

The Indian cotton market witnessed no major physical activity with prices marginally declining during this week while the new crop planting progress picked up pace which was ahead 36 percent from last year.

US MARKET:

Major market volume shifted to the new crop December contract on the ICE futures which now remains the benchmark for our analysis unless otherwise mentioned.




Downward trend persisted on the ICE cotton futures which fell to near 6 month low breaching the 70 level mark for the new crop December which settled at 69.36 cents/lb on Friday while the old crop July received support from trade shorts squaring off their position attributed to the mill fixation.

Remaining speculators liquidated their long position while the index fund rolled over their position into the next month December which recorded a large volume totaling at 92,259 lots for both trading sessions of June 13-14.

This week it seems that trade shorts attributed to the outstanding on call commitments were less aggressive which pushed old crop July down 3.81 cents or 4.3 percent to finally settle at 71.88 cents/lb. The market has now reached the oversold condition as it lost nearly 17 cents with a straight blood spill downward trend drawn on the technical chart and may likely observe a rebound however on a limited upside.

The outstanding on call commitments reduced significantly for the week ending June 8. July on call position decreased sharply 9,060 lots to 15,500 lots (1.55 million 480lb bales) and there may have been further decline during this week(June 12-16).

Meanwhile, export sales report painted a weak performance for the week ended June 8. The USDA, in its weekly export sales report released on June 15 pegged new 2016-17 export commitments at 72,700 Running Bales (RB) in the week June 2-8, 2017 which declined 21 percent from previous week's 92,100 RB. (Full Report)

The planting progress picked up pace as it completed 92 percent from the total estimated target area at 12.2 million hectares as of June 11, which was well ahead from 87 percent planted during the same period in the previous year.

Further, the crop condition report showed 97 percent of the total planted crop is in fair to excellent condition. However, reports were circulating that high temperatures excessive winds and lack of moisture were impacting the crop growth which is an early speculation but should not be shunned.

The USDA’s annual acreage report is due on the June 30 which will give clear picture of the final estimated acreage for US. The USDA prospective planting raised all cotton planting area by 21 percent to 12.2 million hectares for 2017-18 in the March 31 annual report.

Meanwhile, only 5 sessions were left for the first notice day of old crop July and assuming that the on call commitments have fallen to 1 million bales during this week, there is still a large open interest tied up majorly to the large trade shorts who will have to short cover pushing prices higher during next week. Also, the large certified stocks were in question which stood at 476,100 bales whether the remaining long positioned speculators would like to take delivery if prices were lucrative enough.

CHINA MARKET:

The ZCE cotton futures trended bearish on major sell off with prices hitting a 6 month low on Friday amid weak global cues.

The benchmark September contract settled at 15,165 yuan/tonne, dropping nearly 3 percent over the week on Friday.

Open Interest as of June 15 showed an intraday increase on additional speculative short selling however remained lower 5 percent to 222,736 lots since June 8.

Expectation of higher crop production to 5.03 million tonnes(29.5 million 170kg bales), up 4 percent from 2016-17, large stock remaining with the State Reserve and slack demand from spinning mills amid stocked up inventories lasting upto 30 days was heavily weighing on prices in the past two weeks.




Meanwhile, the State Reserve auctioned a total of 150,226 tonnes from which it sold 91,194 tonnes for the week ended June 16 touching a weekly turnover at 61 percent. Since the commencement, around 1,511,181 tons (88.90 lakh 170 kg bales) were sold from the total offered quantity of 2,170,799 tons (127.69 lakh bales). (Full Report)

INDIAN MARKET:

The Indian cotton futures exhibited a bearish trend on major long liquidation on the benchmark June contract and additional short selling on the July contract for the week ending June 16.

The June contract on the MCX futures fell to a 23 week low at Rs 19,820/bale on June 15 and finally settled at Rs 19,870/bale. Minor short covering was witnessed which pushed prices higher to settle at Rs 20,810/bale.

Open Interest dropped sharply 26 percent to 3,544 lots (88,600 bales of 170kg) amid prices plunging Rs 560 or 2.7 percent to Rs 20,810/bale indicating aggressive long liquidation since June 9.

The July contract dropped 2.2 percent to Rs 20,470/bale with open interest rising 59 percent to 4,333 lots(1.08 lakh bales) indicating aggressive sell off amid bearish spot and global cues.




Technically, the bandwidth is rising amid price fall indicating a downside trend being drawn on the technical chart for the June contract. We recommend selling on rise from Rs 20,180 to Rs 20,713 with stop loss at Rs 20,800. Support for the week is placed at Rs 19,733 and Rs 18,753 while resistance is observed at Rs 20,713 and Rs 21,693.

DOMESTIC SPOT MARKET:

Bearish trend persisted in the spot market for the third consecutive week as prices marginally lowered Rs 150-300/candy across Central India while was diminutively lower Rs 100/candy in North India and steady trend was observed in South India.




Taking the Gujarat Shankar 6 30mm cotton as the benchmark which marginally lowered 0.6 percent or Rs 280 to Rs 43,610/candy compared to Rs 43,890/candy in the prior week. Meanwhile, the Maharashtra 30mm was down 0.5 percent or Rs 200 to average at Rs 43,660/candy from Rs 43,860/candy in the previous week.

Bearish trend on the futures exchange influenced spot prices with major impact observed in the markets of North India where prices plunged to a 5 week low on June 16 ranging between Rs 4,520-4,520/maund(43,140-44,120/candy).

Physical activity was completely lackluster as the spinning mills were silent amid bearish cues and the agitation of the textile association against the higher 18 percent GST on job work leading them to call for a strike on June 15.

The strike which began in Gujarat was supported by various other textile association across the country which incurred a hefty loss of Rs 200 cr as per market reports.

The market participants adopted a wait and watch approach on further clarity on the GST rates as no sales in the yarn market with no official offer available in the market. The benchmark 60s carded weft was quoted tentatively between Rs 226-248/kg in the market of Coimbatore.

Fundamentally, the market was lacking enthusiasm as major domestic spinning mills restricted procuring cotton bales mainly due to slack sales in the yarn market over confusion on manmade yarn GST.

The old crop supply was gradually depleting as expected and as per the data collated from market sources, arrivals for the week (June 12-16) declined 5.4 percent to 1.06 from 1.12 lakh bales in the week prior (June 5-9) with the average daily arrivals falling to 21,200 bales from 22,300 bales.

The total supply figures of old crop touched 32.12 million 170kg bales which was 94 percent of the estimated target 34.05 million bales as of June 9 according to Cotton Corporation of India (CCI). (Full Report)

Meanwhile, the new crop planting progress was gradually picking up pace as the country has sown 16.67 lakh ha as of June 15, higher 36.2 percent from previous year’s 12.24 lakh ha. Surprisingly, it lagged 5.67 lakh ha to the 5-year normal area average as on date at 22.28 lakh ha.

Farmers are encouraged to increase their sowing acreage shifting from other commodities after receiving a lucrative price in 2016-17. Further, the Agriculture Ministry raised raw cotton (kapas) rates by Rs 160/quintal to range between Rs 4,020/quintal(Medium Staple) and Rs 4,320/quintal(Long Staple). (Full Report)

Conclusion:




Domestic spot cotton prices is on a downtrend as observed in the historical price chart. After hitting the season high during the first week of April, prices were on a downhill to reach the levels observed during end of January between Rs 43,000-44,500/candy taking the superior quality lint as the benchmark.

Further, US cotton market set a benchmark influencing the world cotton prices in the past few months. After the almighty bull run during May 12-16, US cotton on ICE futures fell nearly 16 cents to 71 cents on the old crop July followed by Cotlook Index dropping 11.5 cents to 83.40 cents/lb, China ZCE futures dropped 1,475 yuan to 15,065 yuan/tonne (99.26 cents/lb), Brazil Index dropped 4.71 cents to 83.74 cents/lb and the Indian MCX futures dropped Rs 1,880 to Rs 19,820/bale(83.70 cents/lb).

Marginal changes was observed on the Indian spot market, taking the Gujarat S6 30mm as benchmark, which dropped 1.86 cents to 85.36 cents/lb(Rs 43,050/candy).

With major producing countries such as India, China and US observing a rise in 2017-18 crop prospects, the rest of the world(ROW) ending stock which excludes China, as drawn by the International Cotton Advisory Committee (ICAC), stands at 53.4 million 170kg bales(9.08 million tonnes) which is 14 percent higher compared to previous season at 47 million 170kg bales(8.04 million tonnes).

Further, a minor import revision downward by 2 lakh bales to 30 lakh bales in the Indian cotton balance sheet keeping the ending stock at 41 lakh bales which is quite an ample considering the large new crop prospects for 2017-18 ranging between 35-37 million 170kg bales.

Considering the above factors, we believe there is little room for a sharp bull run in Indian cotton prices. The other factor which will add pressure on cotton price, observing the past trend and the law of economics, the US cotton spot price which stands at 71.90 cents/lb which is at a significant discount by nearly 14 cents compared to Indian cotton spot at 85.36 cents/lb.

We place long term resistance on cotton spot price at Rs 45,500/candy(benchmark Guj S6) while the near term stands at Rs 44,000/candy.

(By Commoditiescontrol Bureau; +91-22-40015534)