Cotton Weekly: WASDE Brings Bearish Cues Across The Globe

MUMBAI (Commoditiescontrol)- The less impactful Hurricane which weakened to incur minor losses and the USDA World Agricultural Supply Demand Estimates (WASDE) brought a sharp correction to the market this week.

US MARKET:

The US market snapped from three consecutive week of bull rally after threat of Hurricane faded away followed by USDA World Agricultural Supply Demand Estimates (WASDE) weighing on the market sentiment.


The benchmark December contract nosedived 552 points over the week to settle at 69.07 cents/lb on Friday on major long liquidation as the open interest, as on Sept 14, dropped 4 percent, week on week, to 141,343 lots.

Trend reversal began earlier in the week as Hurricane Irma weakened into Tropical storm and eventually fading away, taking all the bullish speculators off the market in process.

Feeding on the bears, the USDA WASDE report released on September 12, once again surprised the market by raising US cotton production forecast to an overstated figure of 21.76 million 480lb bales from 20.55 million bales. (WASDE Report)

The World production forecast is also raised to 120.75 million bales from 117.31 million bales and keeping the ending stock at a higher side of 92.54 million bales from 90.11 million bales and 89.57 million bales in 2016/17 season.

An immediate reaction to the report and the cotton market settled limit down in three contracts on September 12 . (Full Report)

The unbelievable factor was that how USDA ignored hurricane impacted crop in Texas, Florida, Georgia, etc. However, USDA mentioned in a special note that they did not have enough time for full assessment of Hurricane impacted area and the October WASDE would include revised figures from the complete assessment of crop and area loss.

Traders found the WASDE report too overstated to be true hence were still in a state of confusion over the extend of crop loss. This was evident in the cotton prices trading in a tight range of 115 points of 68.31-69.46 cents in the past three sessions (Sept 13-15). The September WASDE proved to be more of a imagination than a real picture and the market may trade the next few weeks on its own data.

Meanwhile, in line with market expectations, the USDA weekly net export sales plunged 42 percent to 69,052 Running Bales(RB) for the week ended September 7 from previous week's 119,078 RB. Shipments were recorded at 112,200 RB during the week (Sept 1-7) which dropped 33 percent from previous week’s 167,785 RB.

Total commitment for the 2017/18 MY reached 7.21 million 480lb bales(48.4%) of USDA’s revised forecast to 14.9 million 480lb bales of which 1 million 480lb bales(6.7%) have already been shipped.

USDA raised the export forecast by 0.7 million bales to 14.9 million bales in hopes rise in demand from various countries especially China. China has a potential to import more than 5.1 million 480lb bales(6.5 million 170kg bales) as their opening stock for 2017/18 is expected to drop 17 percent to 48.42 million bales after a good season of State Reserve Auction.

However, experts believe timing is the key and Chinese demand would likely be witnessed after January.

The market seems to be in a comfortable spot with a tug of between the bears and bulls with neither ready to give up and this may likely remain the trend until October WASDE unless fresh cues hit the market. Key support is placed at 66 cents while key resistance is placed at 72 cents.

Even if we take of 1.5 million bales at the maximum level of extend of crop loss then production potential can reach 19 million bales much higher than 17.17 million bales in 2017/18.

Meanwhile, the on-call sales commitment rose 0.36 million bales to a total of 13.11 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 108 points as of September 15.

CHINA MARKET:

The ZCE cotton futures incurred major losses throughout the week on long liquidation tracing weak global cues.


The benchmark January contract settled on a two week low at 15,360 yuan/tonne on Friday, down 305 yuan/tonne over the week while open interest plunged 15.5 percent to 248,128 lots.

The market plunged 715 yuan since hitting four month high at 16,015 yuan/tonne on September as weak global cues and the USDA WASDE report on September 10 weighed heavily on prices.

The USDA WASDE made upward revision of 0.1 million 480lb bales to 1.1 million bales from August forecast of 1 million bales while kept all other figures unchanged.

Production is forecast to increase 8 percent at 24.50 million bales from 2016 at 22.75 million bales while ending stock is forecast to decline 39 percent to 39.47 million bales due to the strong state reserve auction in 2017.

The state reserve auctioned a total of 136,780 tonnes from which it sold a total of 124,556 tonnes for the week ended September 15, recording a weekly turnover at 91 percent. (Full Report)

State Reserve has sold around 2,942,056 tonnes (17.31 million 170kg bales) were sold from the total auctioned quantity of 4,090,680 tonnes (24.06 million 170kg bales) taking the season’s turnover at 71.92 percent.

Technicals are signaling weakness in the market with prices falling below the 18 day moving average and falling stochastics. Prices have retraced 50 percent of fibonnaci retracement level and has a potential to follow bearish trend next week.

INDIAN MARKET

The Indian cotton futures witnessed trend reversal snapping from a three consecutive week bullish trend.

The benchmark October futures settled at 18,610/bale, plunging over 3 percent or Rs 640 over the week on Friday.

Open interest rose 10 percent to 2,862 lots(71,550 bales of 170kg) indicating major short selling took place during the week on focus of large crop prospects ranging between 37-40 million 170kg bales.

The market witnessed immediate trend reversal early in the week tracing the bearish global cues and bearish trend persisted for three consecutive sessions as prices fell to Rs 18,350/bale, a three week low on September 13. Prices nosedived Rs 1,110 since hitting a three month high at Rs 19,460/candy on September 6.

However, prices witnessed minor recovery by closing on the positive side for two consecutive sessions(September 14-15) to finally settle at Rs 18,610/bale.

Despite recording a bearish weekly candle, prices hovered above the Daily Reversal Value (DRV) at Rs 18,262 as the price strategy is to hold long whilst maintaining a stop loss at Rs 18,000.

Accumulate at Rs 18,230 or below with inter week support levels at 18,230-17,390 and resistance at 18,690-19,070-19,460 with bull rally to persist if prices breach the key resistance level of Rs 19,460.

DOMESTIC SPOT MARKET:

Spot market turned bearish after USDA WASDE report weighed on global cotton prices and large crop prospects burdened old crop prices in the domestic market.

The weekly average of benchmark Gujarat S6 cotton plunged Rs 780 to Rs 42,170/candy while the Maharashtra and Madhya Pradesh cotton weekly averages dropped Rs 510-520/candy to average around Rs 43,020-43,280/candy.

New crop prices in North India traded on the bearish side three out of the five trade sessions with the weekly average plunging Rs 573-620/candy to Rs 38,921-39,112/candy(Rs 4,078-4,098/maund). Wide price difference in Lower Rajasthan cotton weekly average was due to switchover to new crop.

Indian cotton market trended on global market cues for the third consecutive week with the first two week being on the bullish side and on the bearish side in the current week.

The Hurricane Irma was no longer a threat to US cotton market while the USDA WASDE report added another boulder weighing on global cotton prices.

The USDA WASDE raised Indian cotton production forecast by 11 percent to 38.4 million 170kg bales from 2016/17 season at 34.5 million bales while kept ending stock at 18.7 million bales(Aug-July), quiet overstated figure as traders report ending stock to be around 4 to 4.5 million bales.

Large crop prospects once again became the center of attention while early arrival of new crop supply, in miniscule quantity, across Central India and early quotes of forward rates ranging between Rs 38,000-39,000/candy(October Delivery), Rs 37,500-38,500/candy(November delivery), Rs 37,000-38,000/candy(December delivery) has heavily weighed on old crop rates.

Spinners were satisfied with inventories to meet their near term requirements and curbing their bales procurement sentiment was the poor offtake in the yarn market due to sluggish retail sales in the garment sector.

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)

On the crop scene, Total cotton planting crossed 12.1 lakh ha as of September 14 compared to same period last year at 102.23 lakh ha covering nearly 99.2 percent of the total normal area at 122.46 lakh ha and remained ahead 6.4 percent from the normal area as on date at 114.24 lakh. (Full Report)

New crop supply commenced in Punjab, Rajasthan, Madhya Pradesh followed by Gujarat/Maharashtra during the week. Total arrivals, according to traders, for the week reached 33,500 bales compared to 11,100 bales in the prior week(Sept 4-8).

As of date, North India procured 42,000 bales(Punjab 11,800 bales, Haryana 23,650 bales and Rajasthan including Lower Rajasthan 8,500 bales) while, Central India procured reached 8,300 bales(Madhya Pradesh 5,700 bales, Gujarat 1,600 and 1,000 bales at Maharashtra).

Ginners across Central India will likely resume pressing after September 21 as the current fifteen day(Sept 6-20)period was inauspicious to resume business. Meanwhile, the new crop contained high amount of moisture from early sown crop which was not appealing for spinners to resume bales procurement hence it did not make sense to begin ginning in full swing.

Conclusion:

With early arrivals of new crop and forward quotes trading at a discount of nearly Rs 4,000/candy, potential of bull rally in old crop prices have faded away. Further, disinterest shown over procurement of old crop has brought a conclusion to 2016/17 season.

Two more weeks are left until 2017/18 season commences various factors were pointing prices on the bearish side as we previously anticipated.

The benchmark Gujarat S6(30mm) last traded at Rs 41,750/candy however there were no takers at this price level.

The market continued to witness light rains on a regular basis which proved to be more beneficial than having a negative effect.

There were some export inquiries, forward basis December delivery, from Vietnam, Bangladesh, China, Thailand, etc despite higher conversation rate of Rupee against dollar. The volume was not ascertained however experts believe that Indian cotton export has a potential to reach 7.5 million bales in 2017/18 season.

This could be true as China is expected to import in large quantity of more than the forecast figures of 1.1 million tonnes(5.8 million 170kg bales).



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