Cotton Weekly: Hurricane IRMA inbound! Market Trades With A Bullish Bias

MUMBAI(Commoditiescontrol)- Hurricane Irma dominated the market placing the bulls at the frontline as prices across major market rose throughout the week and the latest weather advisory showed that next week as well the bulls would dominate next week.

US MARKET:

US cotton futures persisted bull rally for the third consecutive week with the benchmark December ending the week 271 points higher(4%) as Mother Nature ‘took the market by storm’ or rather a Hurricane.

Focusing on the weather conditions, Hurricane Irma is the showstopper in the market making traders nervous on expected damage of cotton crop across Florida, Georgia, South/North Carolina. As of the latest advisory 40, at 23:00 EDT on Sept 8 (8:30 IST, Sept 9), Hurricane Irma is a category 5 storm with maximum sustained wind of 160 mph and is expected to make landfall at South Florida at 20:00 EDT Sept 10(5:30 IST, Sept 11).

Around 4.23 million 480lb bales of production potential planted in 2.01 million acres land was at risk. However, many analysts believe that harvesting was in full swing and some farmers picked cotton early in order to avoid impact from Hurricane Irma.

After WASDE surprised the market by raising US 2017/18 production forecast at 20.55 million bales, a 11 year high, prices slumped 455 points to record a 10 week low at 66.64 cents from previous high at 71.19 cents on August 9, a day prior to August WASDE report. (WASDE Aug)

However, two back to back storms, first being the Tropical Storm Harvey which made landfall on August 25 impacting nearly 0.5-0.8 million bales(market estimates), second being the inbound Hurricane Irma, has brought the bulls back into the game. Prices have rallied nearly 911 points to a new contract high at 75.75 cents on Sept 9, from previous 10 week low at 66.64 cents.

During this period (Aug 15-Sept 9), there has been a lot of longs added and shorts covered. The CFTC Report, as of Sept 5, showed Managed Money(options/futures combined) net long increase 26,584 lots to 56,180 lots(3.08 million bales). In the past two week, major short covering contributed to price rally breaching key resistance one after the other.

The USDA WASDE report is due next week on Sept 12 at 12:00 ET(21:30 IST) which may give some clarity over the damage figures of Texas crop and production forecast could be revised downwards of 20 million bales. However, it depends whether USDA officers have surveyed the entire impacted Texas region because the crop condition report showed no major changes from previous week which could mean that the figures in the WASDE Sept forecast would not witness major changes. (Full Report)

In a tweet, O. A. Cleveland, cotton expert/analyst said, “Remember, September WASDE and crop estimate will be based on conditions as existed on September 1, i.e., today(Aug 31)”.

Market analysts have already been second guessing USDA and September WASDE will clear avgghll doubts as to whether the market will trade on WASDE figures or develop its own trade data.

On the demand side, USDA weekly net export sales plunged 50.3 percent to 119,078 Running Bales(RB) for the week ended August 31 from previous week's 239,644 RB. Shipments were recorded at 167,785 RB during the week (Aug 25-31) which marginally rose 6.1 percent from previous week’s 158,144 RB.

Total commitment for the 2017/18 MY reached 7.14 million 480lb bales(50.3%) of USDA’s forecast at 14.2 million 480lb bales of which 0.9 million 480lb bales(6.3%) have already been shipped.

The market continued to trend on Hurricane concerns making most traders nervous as the extent of damage remains uncertain. Early predictions suggest that even if 3 million bales were deducted then total production has a potential to reach 17.55 million bales which is marginally higher than 17.17 million bales in 2016.

The country is likely to face shortage of quality grade cotton in the next two months which could support prices to an extend hence the trade range for next week is placed between 67-76 cents/lb with a bullish bias until the Hurricane worries is cleared from the market.

Further, the on-call sales commitment rose 1.27 million bales to a total of 12.74 million bales with December and March accounting for nearly 54 percent of the total commitments, likely to provide support in the long term.

The December to March inversion is at 118 points as of September 8.

CHINA MARKET:

The ZCE cotton futures broke free of the monotonous sideways trend and surged 3 percent over the week after notice issuance by the State Reserve and bullish global trend.

The benchmark January contract settled at 15,665 yuan/tonne on Friday, surged 350 yuan/tonne over the week while open interest rose 14 percent to 293,514 lots.

On Monday, prices rallied 4.3 percent to hit an 4 month high at 15,910 yuan/tonne after the State Reserve issued notice to restrict non cotton enterprises from participating in the remainder of auction period in order to meet the supply needs of cotton enterprises. (Full Report)

Further, uptrend followed through until Wednesday as prices hit a fresh 4 month at 16,015 yuan/tonne tracing the bullish global cues.

However, trend reversal on Thursday across global futures influenced prices which plunged 1.2 percent to a one week low at 15,665 yuan/tonne. Open interest plunged 13 percent, on intraday basis, to 293,514 lots indicating major long liquidation on Friday.

Meanwhile, the state reserve auctioned a total of 148,264 tonnes from which it sold a total of 129,889 tonnes for the week ended September 1, recording a weekly turnover at 88 percent. (Full Report)

State Reserve has sold around 2,817,500 tonnes (16.57 million 170kg bales) were sold from the total auctioned quantity of 3,953,900 tonnes (23.26 million 170kg bales).

INDIAN MARKET:


The Indian cotton futures exhibited a bullish trend for the third consecutive week tracing bullish global cues.

The benchmark October futures settled at 19,250/bale, higher nearly 2.6 percent or Rs 490 over the week recording a new contract high on Friday.

Open interest rose 3 percent to 2,601 lots(65,025 bales of 170kg) suggesting new longs added throughout the week.

Prices breached the key weekly resistance of Rs 19,140 with a bullish candle in the price chart with a potential of rally to Rs 20,275, the next key resistance.

Weaker opening and correction first to Rs 19,153-18,847 can be used for buying with a stop loss of Rs 18,700.

Currently, we recommend accumulate with weekly resistance levels of 19,557 and 20,267 while inter week support is seen between Rs 18,847-18,137.

DOMESTIC SPOT MARKET:

Spot market persisted sideways trend with marginal movements in the weekly averages of benchmark spot prices during the week Sept 4-8.

The weekly average of benchmark Gujarat S6 cotton marginally lowered Rs 70 to Rs 42,950/candy while the Madhya Pradesh cotton rose Rs 110/candy to a weekly average of Rs 43,280/candy.

North India switched over to new crop quotes ranging between Rs 4,143-4,458/maund(39,550-39,700/candy) with total new crop supply touching 14,200 bales as of Sept 8.

The market trended on the bullish global cues attributed to Hurricane Irma to make landfall at South Florida on Sept 9 at 20:00 EDT Sept 10(5:30 IST, Sept 11). Tracking the futures market trend, spot prices rose earlier in the week however gave up nearly 50 percent of the gains to settle almost steady to previous week.

Trade activity persisted lethargy since June 1 on heels of poor offtake of yarn. Sellers were running low on high grade lint hence were restricted to offload at lower bid rates. Buyers on the other end were uninterested to procure at higher rates and with no encouraging factor to renew their buying spree.

The 2016/17 season for the textile sector could be ranked as the worst year with two big economic moves, Demonetization in November of 2016 and GST in July of 2017, hitting the trade activity. Gone are the days when traders and stockists in the yarn market used to procure to stock their inventories. Now they prefer to run their operations on a hand to mouth basis and offload their stock depending on immediate demand supply factors. (Read our previous weekly report for further explanation)

Total cotton planting nearly reached 121 lakh ha as of September 7 compared to same period last year at 101.72 lakh ha covering nearly 98.8 percent of the total normal area at 122.46 lakh ha and remained ahead 7 percent from the normal area as on date at 113.10 lakh.

New crop supply has already commenced in Haryana with the total arrivals during the current week at 8,700 bales from 2,600 bales in the week prior(Aug 28-Sept 1). Daily arrivals averaged at 2,000 bales with the likelihood of growing to an upwards of 3,000 bales next week.

I. J. Dhuria, Director(Materials), Vardhman Group, forecast 2017/18 crop at 40.5 million bales in 119.54 lakh ha with an average yield of 575.5 kg/ha. While historical 5 year average yield of 539.3 kg/ha pegged production at 38 million and majority market traders were more inclined to this figure rather than the 40.5 million bales forecast.



Conclusion:

Domestic market traced global futures trend and witnessed volatility throughout the week with marginal movement in spot prices. Price chart continued to paint a sideways trendline on the benchmark superior varieties of cotton(30mm). There maybe fluctuations in some lower grade varieties depending on the availability and demand.



The benchmark Gujarat S6(30mm) continued to hover around the Rs 43,000 level for the third consecutive week, this time closing down at Rs 42,750 on Sept 8. We are just three week away from the new season, beginning from October 1 and forward quotations are going to pour in soon with market expectations of quotes ranging between Rs 38,000 - 39,500/candy for end of October delivery.

There were concerns of new crop being delayed due to excess rains during first week of September however we would wait for another week to reach a final conclusion. Weather forecast suggest cloudy conditions to persist with some light rains throughout September and if weather conditions remain favorable supporting crop growth throughout the next two months then the production potential could cross 37 million bales as planted area is almost reaching normal area average at 122.46 lakh ha.

Next week, market may trade on Hurricane Irma concerns with USDA WASDE due on September 12 bringing fresh cues.



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