Cotton Weekly: On-going Rains Weigh on Indian Cotton Market

MUMBAI(Commoditiescontrol)- Indian cotton market continued downtrend with hefty losses incurred at the North India and Mahrashtra cotton market while the US market witnessed a rebound on short covering.

US MARKET:

The US cotton futures rebounded with the benchmark December contract rising 184 points while next month March rose 200 points over the week.



The benchmark December contract settled at 68.42 cents/lb on Friday. However, the open interest, recorded as of July 20, showed a drop by 616 contract, on a weekly basis, to 162,702 lots(16.94 million 480 lb bales) amid 261 points rise in price to 68.98 cents/lb indicating that the rebound in cotton prices may likely have been due to short covering.

Managed money continued to liquidate their net long position to 22,510 lots (2.34 million 480lb bales), down 3,900 lots from week ended June 8 confirmed the CFTC report which indicated that managed money market players were betting on a more bearish market focusing on the large crop forecast estimates for 2017/18 with the global ending stock estimated at 8.25 million 480lb bales according to USDA WASDE July forecasts.

The USDA export sales showed modest gains for the 2016/17 marketing year pegging new sales at 29,700 Running Bales(RB) with total shipments at 14.06 million 480lb bales. As per our calculations, the total shipments would touch 14.5 million 480lb bales with average shipments at 0.25 million bales. The 2017/18 market year sales’ growth remained strong as total commitments were at 5.03 million bales. Now, if we include the remaining outstanding commitments of 2016/17 season then the total commitments for the next market year stands at 6.1 million bales, excluding new sales remaining for the two weeks remaining in the month of July. (Full Report)

The higher outstanding commitments is painting a tight supply situation for the fourth quarter supply needs. Depleting certified stocks which has dropped 267,224 bales of 480lb each, since July 3, to 46,529 bales as of July 20.

Speculators were the major active players in the market trading on weather conditions report impacting cotton price while major market players ignore the tight ending stock for the US market.

The market is trading in tight range of 66-70 cents/lb since past two weeks. The On call purchases and sales totaled at 100,535 lots (10.05 million 480lb bales) from which on-call sales in December-March were at 60,543 lots(6.05 million bales) while on-call purchases totaled 25,894 lots (2.59 million bales). These unfixed positions provide decent support and resistance and make it more difficult for the market to break out of its current trading range, as mill fixations will increase in the mid-60s, while growers will become active once December moves above 70 cents.

CHINA MARKET:

The ZCE cotton futures exhibited an upward trend for the second consecutive week with the benchmark September contract settling, intraday basis, on the higher side 4 out 5 trade session for the week ended July 21.

The benchmark September contract settled at 15,350 yuan/tonne on Friday, higher 155 yuan/tonne over the week. Open Interest, as of July 20, declined 15 percent over the week to 157,070 lots amid rise in price by 2.4 percent to 15,550 yuan/tonne indicating major short covering observed throughout the week.

Meanwhile, the state reserve auctioned a total of 149,209 tonnes from which it sold 118,058 tonnes for the week ended July 21 touching a weekly turnover at 79 percent.

Since the commencement, around 1,999,605 tonnes (11.76 million 170kg bales) were sold from the total offered quantity of 2,917,646 tonnes (17.16 million 170kg bales). (Full Report)

INDIAN MARKET:

The Indian cotton futures ended the week on the higher side as the benchmark July contract rose 290 points on major short covering.

The benchmark July contract on MCX futures settled lower 1.5 percent (290 points), over the week, to Rs 20,280/bale amid short covering as open interest dropped 14.4 percent to 3,897 lots (0.97 lakh 170kg bales). The spread between the old crop July and new crop October continued to expand and now has reached 2,490 points.

Next week would the last for trading on the old crop July and then the entire market focus would be on the next month October contract which is trading at a significant discount amid bearish cues from the spot market.

Technical chart showed a symmetrical triangle pattern indicating a period of consolidation and breakout of which could likely trigger an upward trend if crossed Rs 20,850 while stop loss is maintained at Rs 19,470. Inter-week support is placed at Rs 19,970-19,420 while resistance is place at Rs 20,520-21,070.
DOMESTIC SPOT MARKET:

Spot market persisted downtrend as major benchmark prices showed a negative trend, with average weekly prices ranging between Rs 42,500-Rs 44,500/candy.

Bearish trend picked off from July 12 onwards as on-going heavy spell of rainfall nullified all fears in relation to crop growth in Central India.

North Indian cotton market incurred massive losses with prices falling to 6 month low levels on Friday, July 21 to average between Rs 4,380-4,395/maund(Rs 41,800-41,950/candy) while the weekly average plunged Rs 160-180/maund to Rs 4,450-4,470/maund(Rs 42,540-42,670/candy).

The Maharashtra was the other market incurring hefty losses as the benchmark cotton(30mm) prices plummeted Rs 1,100/candy to a weekly average at Rs 43,700/candy.

Central India recorded largely excess rainfall during the week (July 13-17) with Gujarat recording rainfall levels of 139.7mm which was the highest amongst the three major cotton producing states and was above normal levels of 64.7mm. Similarly, Maharashtra recorded 129.5mm of rainfall compared to normal levels of 77.2mm and Madhya Pradesh recorded 103.9mm compared to normal levels of 73.7mm. The on-going spell of widespread rainfall paved all the districts of Central India from the deficient red zone to a normal to excess rainfall zones.

Rainfall raised prospects for better cotton production for the 2017/18 season with estimates ranging between 36 million 170kg bales right upto 40 million bales. While the latter seems like an overstated figure, we believe if the weather conditions remain favorable and low pest incidence, then India could likely produce 36-37 million 170kg bales. However, it seemed a bit too early to jump to conclusion as we have the last phase of crop planting will likely last until early August.

Cotton planting reached 104.29 lakh ha as of July 20 compared to same period last year at 86.86 lakh ha which has progressed to 85 percent of the total normal area at 122.46 lakh ha and remained significantly ahead 13 percent from the normal area as on date at 92.06 lakh. (Full Report)

The reason to not dwell in early conclusions is due to some reports of excess rainfall in Gujarat which caused water logging in certain small cotton sowing belts. Trade sources confirmed no major damage but if the rainfall persisted then it could likely affect crop yield, keeping the bear market players on the edge of their seats.

The old crop supply was gradually depleting as expected and as per the data collated from market sources, arrivals for the week (July 17-21) dropped 29 percent to 35,700 bales of 170kg from 50,300 bales in prior week (July 10-14) with the average daily arrivals falling to 7,000 bales from 10,000 bales. The total supply figures of old crop almost touched 33 million 170kg bales which was 98 percent of the estimated 2016/17 season’s production at 33.7 million bales. (Full Report)

The Cotton Association of India revised 2016/17 season production estimate upward by 1 lakh bales to 33.7 million bales along with a higher import to 0.27 million bales and higher exports to 0.63 million bales which keeps ending stock unchanged at 0.41 million bales. While our balance sheet keeps ending stock at almost similar levels at 0.40 million bales which is good enough to satisfy mills consumption for the first two months of 2017/18.

Conclusion:

The focal point of the Indian cotton market is, at present, on the higher 2017/18 crop prospects amid favorable weather conditions. Further, the country may likely not dwell in tight supply situation it observed in the previous cotton season which will keep the sentiment on the bearish side.

One factor which could likely revive an uptrend is the expectation of revival of demand from spinning mills following the revival in yarn procurement after reports of textile traders returning to their business’ after a month long strike in order to meet festive production deadlines.

However, that uptrend would remain for a short period of time with probabilities of a prices rallying, by a long shot, Rs 1000 to Rs 1,200/candy. Taking the Gujarat S6(30mm) cotton price as benchmark for our analysis, the uptrend could likely rally prices to the first resistance level at Rs 44,000/candy while we keep the long term resistance at Rs 45,000/candy which we believe may not be breached.

The October contract on the MCX exchange settled at Rs 17,830/bale as on July 21 and the large 13.6 percent inverse spread between spot prices and futures price is also acting as another roadblock making all the uptrend efforts in vain.

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