Cotton Weekly: MSP Bonus/Texas Freeze Attracts Short Term Upsurge

MUMBAI(Commoditiescontrol)- Bonus on MSP announced by Gujarat and potential Texas freeze attracted upsurge in India and US however momentum was not long lasting.

US MARKET:

The US ICE cotton futures ended the week higher over raised MSP in Gujarat, India and potential Texas freeze over the weekend.

The benchmark December contract witnessed an early rise to touch 70.22 cents/lb after which witnessed a pull back to settle at 68.20 cents/lb on Friday. The weekly change showed a positive growth of 2 percent.

The market was pleasantly trending on bearish WASDE figures of large domestic crop production at 21.12 million 480lb bales(27 million 170kg bales), up 23 percent from 17.17 million 480lb bales in 2016/17 and large world ending stock at 92.37 million 480lb bales (118.1 million 170kg bales), up 3.4 percent from 89.37 million 480lb bales.

However, the bonus on MSP by Gujarat and potential freeze over Texas raised prices of both US cotton market to 70.22 cents/lb and Cotlook Index A to touch 80 cents/lb. The tension eased on both ends on rising supply in India and traders anticipating that around 250,000 bales of 480lb(20% of crop which is still in boll opening process) is at risk which will not hinder large crop production.

The US cotton market was trading in a tight range of 66-70 cents since September 12 with trade short covering, attributed to mill on call fixation, at lower levels supporting prices while bearish domestic balance sheet limiting prices to breach 70 cents.

The CFTC report showed that in the past four months since June, the money managed fund holders liquidated 32 percent to 47,061 lots as of Oct 24 compared to 68,915 lots as of June 13 and , which is still a large position considering the dominating bearish factors. On the other hand, trade shorts were recorded at 128,952 lots which was significantly lower compared to 161,402 lots same period last year which is surprising.

One reason that could explain the lower trade shorts is that producers were still hesitant to hedge themselves as good quality cotton crop has been delayed to hit the markets. While, they were also exiting the futures market amid mill fixations attributed to on-call commitments. In other words, merchants were increased their short book in the cash market instead of New York and have been in no hurry to cover more than needed since they are anticipating lower prices

The on-call commitments in for December contract continued to unwind in line with trade shorts exiting the market during the same period(Sept 8-Oct 20). The on-call sales for December declined 31 percent to 22,149 lots as of Oct 20 compared to 31,912 lots on Sept 15. Net trade shorts during the same period declined 17 percent to 128,952 lots as of Oct 24 compared to 156,933 lots as on Sept 12.

The bias is favoring the bears more now amidst large crop prospects domestically and globally. Hence, there is still a wide room for merchant/producers to be net sellers in the days ahead while hedge funds will eventually liquidate their remaining net long position.

The USDA weekly net export sales remained strong for the second consecutive week, rising 22 percent to 305,247 Running Bales(RB) for the week ended October 19 from previous week's 270,726 RB. Net shipments were recorded at 102,121 RB during the week (Oct 13-19) which rose 8 percent from previous week’s 91,844 RB. Total commitment for the 2017/18 MY reached 8.67 million 480lb bales(56%) of USDA’s forecast at 14.5 million 480lb bales which lowered in the October WASDE report.

In order to reach USDA’s forecast, sales need to touch 142,114 RB each week while shipments need to touch 310,234 RB.

There is a high potential for prices to fall below the key support levels of 66-65 cents/lb. The December index fund roll is scheduled to commence from Oct 30 onwards will continue (at varying levels) through mid-month. Expect prices to trend more on the bearish side next week unless another pace of aggressive mill fixation support prices at 67 cents level.



Technical Ideas: Unwinding volatility is dominant at the moment and no directional movement is being witnessed to take position therefore unwind position. Sideways volatility is being witnessed in the band of 70.23-66.00. Support levels is seen between 68.44-66.65 and Resistance between 69.98-70.23

CHINA MARKET:

The ZCE Futures exhibited a sideways trend with the benchmark January trading in a tight range throughout the week.

The benchmark ZCE January futures settled at 14,955 yuan/tonne on Friday, tad higher 0.03 percent from Oct 20 amid 4 percent decrease in open interest to 221,688 lots.

Meanwhile, China cotton imports rose 54 percent, year on year, to 92,687 tonnes during the month of September. The total imports for the calendar year reached 904,479 tonnes, up 38 percent compared to same period last year.

Technical Ideas: Technicals indicate that trend is down with support and demand cluster at 14,910-14,650. Lower range can attract support until 14,600 is not violated. A fall and close below 14,600 with bearish candle can persist downtrend forming a lower top and lower bottom. Traders holding short can maintain a stop loss of 15,120 while resistance is seen at 15,120-15,265. Pullback rise can resume if close is above 15,120.

INDIAN MARKET:

The Indian cotton futures witnessed an early upsurge post bonus on MSP announcement by Gujarat and ahead of October contract expiry.

The benchmark November futures settled at 18,270/bale on Friday, up Rs 250(1.4%) over the week. Open interest increased 14 percent to 3,538 lots(88,450 bales of 170kg) indicating major buying during the week.

November contract witnessed an early upsurge of 2.7 percent to 18,510/bale on the first two days of the week however rising supply eased tension of bonus on MSP news as it witnessed downward correction of 1.3 percent in the remaining three trade session, correcting nearly 50 percent of the total upsurge.

Further, traders may likely rolling forward their position into the next month contract from expiring October contract which settled at 19,090/bale on Friday, up Rs 420(2.2%) on a weekly basis. During the same period, open interest decreased 75 percent to 434 lots(8,525 bales).



Technical Ideas: Weekly technical report suggested to exit long and sell on rise from 18,270-18,483 with a stop loss of 18,700 which also acts as key resistance. Pull back reversal can resume if market closes above 18,700 until then exit long on rise.

Expect lower range of 18,133-17,783 to be tested next week while support is seen at 18,000-17,920-17,610 and resistance at 18,483-18,833-18,700.

DOMESTIC SPOT MARKET:

The Gujarat bonus on minimum support price(MSP) brought an early surge however prices witnessed pull back in some market to similar levels prior to MSP bonus announcement as supply was unhindered.

Daily spot prices trend reverted to levels observed prior to MSP bonus announcement in the Gujarat market last traded at Rs 38,500/candy for the benchmark variety Shankar 6 30mm cotton. Similar trend was seen in Maharashtra cotton prices(30mm) which last traded at Rs 39,000/candy.

The weekly averages showed a mixed trend compared to previous holiday shortened week(Oct 16-18). Due to the upsurge earlier in the week, the weekly averages of various market showed positive momentum except Gujarat and South India.

Most of the markets showed a positive growth of nearly 1-1.5 percent across the board while the weekly average price of Gujarat S6 30mm variety witnessed a negative pull back of Rs 350/candy(0.9%) to Rs 38,620/candy. South India cotton prices ignored the market cues and traded on fundamentals, majorly dominated by rising supply.

The Gujarat government dropped a bull shocker, on Oct 22, by giving out a bonus of Rs 500/quintal over and above the central government set minimum support price(MSP) which speculated tight supply scenario in the market raising cotton prices in early trade on Monday.

However, to a surprise, supply remained unhindered as daily cotton arrival was on a upstream to touch 1 lakh bales on Oct 27. The questionable factor was whether the sentiment of farmers would shift to a bullish side, not just in Gujarat but other states as well, however, at least during this week, farmers were offloading their produce at good rates with highest selling price of Rs 4,900/quintal.

North India and Gujarat were the only regions were selling prices of raw cotton was ranging between Rs 4,300-4,900/quintal while other states ranged between Rs 3,700-4,500/quintal(quality dependent). It looks like that the good quality cotton is being sold at good rates of Rs 4,500/quintal and Rs 4,900/quintal on the higher levels. Compared this to the raised MSP and the difference was around Rs 100-200/quintal dependent on quality of cotton, which in fact was nothing extravagant for farmers to withhold their stocks at higher rates.

Gradually rising supply was a clear evidence to the sentiment of farmers as daily cotton arrivals across the country reached an estimated figure of 1 lakh bales on Oct 27. New crop supply for the week(Oct 23-27) rose significantly to 4.53 lakh bales compared to 1.84 lakh bales in the prior holiday shortened week(Oct 16-18). However, compared to same period last year at 5.03 lakh bales, arrivals were lower 10 percent as Diwali holidays came in earlier this year.

There is no denial that some farmer were interested in offloading their produce at raised MSP levels, which will come into effect from November 1 onwards, hence supply during the first week of November would be the accurate indicator to farmers sentiment.

Conclusion:

At present supply seems unhindered but needs to be keenly tracked in the days ahead. If we look at the market from a tight supply scenario then key support is seen at Rs 37,500-38,000/candy with the uptrend potential to Rs 40,000/candy after which bulls will lose steam as arrivals will increase during the month of December and sluggish demand from both exporters as well as spinners. (Special Report)

However, this is an early speculation, on the contrary, if supply increases then prices will persist downtrend to the next key support at Rs 37,000/candy as exporters will turn active from November onwards to meet their shipment deadlines.

Indian cotton price is trading significantly lower compared to Cotlook Index A as of October 27. Taking the Gujarat S6 30mm has the benchmark, the prices were trading lower 4.4 percent to 75.62 cents/lb compared to Cotlook Index A at 79.1 cents/lb.



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