Cotton Weekly: Supply Rises in India; US Trades in Consolidation

MUMBAI(Commoditiescontrol)- Supply remained unhindered in India, with a potential to rise further, dissolving all speculations of tight supply post raised Minimum Support Price in Gujarat for commodity while US market continued to trade within the consolidated range of 66-70 cents/lb.

US MARKET:

The US ICE cotton futures continued to trade within the consolidated range of 66-70 cents for the seventh consecutive week.

The benchmark December contract settled at 68.72 cent/lb, up 52 points or 0.8%over the week. On November 2, open interest showed a drop of 11% to 100,444 lots over the week.

The index fund roll and weekly export sales report were the two highlighting points of the week acting as a support and resistance, respectively. The index fund roll continued to weigh on cotton prices where the market closed down three out of the five sessions and the export sales brought more than a 100-point surge on Thursday. (Full Report)

The USDA weekly net export sales was above par at about 228,616 Running Bales (RB) for the week ended on October 26. Net shipments were recorded at 90,270 RB during the week (October 20- October 26) which declined by 9 percent from previous week’s 99,630 RB. Total commitment for the 2017/18 MY reached 8.91 million 480lb bales(61%) 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 139,808 RB each week while shipments need to reach 315,666 RB.

Further, prices received support at 66-67 cent/lb level, from trade short covering attributed to mill on-call fixation. The CFTC on call report, for the week ended on October 26, showed December on call commitments declining by 1,715 lots to 20,434 lots (2.043 million bales of 480lb bales) and further decline has taken place during the current week ended on November 4 which was evident on the price trend amid drop in open interest. The total all contracts on commitments rose by 3,453 lots to 140,663 lots (14.07 million bales).

The market has been trading in the consolidated trade range of 66-70 since September 12 and longer the market consolidates, greater the rally or break is apt to be. Next week, the USDA November World Agricultural Supply Demand Estimates (WASDE) is due on November 9 and the Goldman Sachs index roll is scheduled to commence from November 7 onwards until November 13. This is likely to bring in fresh cues.

Fundamentally, cotton harvesting has reached halfway point and many ginners are running full scaled operations. There were some micronaire issues faced in Lubbock and Lamesa but as a whole the grades of cotton were gradually improving. Merchants will be in full swing to meet their export commitments and there is a possibility that the market will move northward from here onwards.

There is still a potential for traders to become net sellers as they hedge their produce as more cotton gets classed/receipted. The spec longs have slowed down as the latest CFTC report, as of on October 31, showed that managed money reduced their longs marginally by 0.13 percent to 61,679 lots and decreased their shorts by 2.3 percent to 14,365 lots taking the net difference to a net long of 47,314 lots.

While the trade will probably have to extend its net short, a lot will depend on what specs and index funds do with their positions. If they are net buyers going forward may balance out any additional trade selling. If specs turn sellers themselves, then the market could see a steeper drop.

Whether the market will succumb to bearish forces once the crops fully hit the market remains to be seen.



Technical Ideas: Prices have not breach the range of 70.22-66.89 hence next directional movement will be seen when prices breach this consolidated range. The demand zone is seen between 67.51-67.65 while the upside breakout is above 70.22 and traders should hold long only prices breach 70.22. Resistance is seen between 69.37-70.22 while support is seen 67.95-66.89.

CHINA MARKET:

The ZCE Futures traded in a tight range with the benchmark January contract experiencing major short covering.

The benchmark ZCE January futures settled at 15,110 yuan/tonne on Friday, higher 1.04 percent from October 27 amid 13 percent decrease in open interest to 191,852 lots indicating major short covering.

China has almost completed harvesting with production estimates at 5.35 million tonnes (315 lakh bales each of 170kg) while imports at near the restricted quota of 1 million tonnes (59 lakh bales each of 170kg) and ending stock at 7.06 million tonnes(415 lakh bales).

China is expected to import more than the import restricted quota in order to replenish their inventories after two successful auctions. China could begin importing cotton from first quarter of 2018 and this could keep the global cotton prices on upward trend especially in India and US who will supply superior quality cotton.


Technical Ideas: Prices have found multiple supports of 14,850-14,890-14,900-14,955 and if the uptrend sustains above 15,180-15,120 with a positive candle then expect a pullback toward 15,265-15,325 range. Traders can cover short position at lower levels of 15,110-15,063-14,947.

Key support is seen at 14,850 while resistance is seen at 15,180. Prices can expect to test higher range of 15,227-15,507.

INDIAN MARKET:

The Indian cotton futures trended in a sideways range in low volume trade.

The benchmark November futures settled at 18,310/bale on Friday, slightly higher at Rs 130 or 0.2% over the week. Open interest increased for the first two days to 3,633 lots (90,825 bales of 170kg each) however, declined to reach the same level at 3,538 lots (88,450 bales of 170kg).



Technical Ideas: Weekly technical report suggested to exit long and sell on rise from 18,310-18,913 with a stop loss of 19,230. Addition of short position has been witnessed as open interest increased with the fall and negative candle. Key support is seen at 18,000 and if the market falls and prices close below the key support level then it could slide to test 17,133, hence it is critical to find support at lower range.

Lower range for the week can be seen at 17,943 along with 18,040. Since the fall was large last week therefore price could recover to 18,547-18,913 levels on intraweek basis.

DOMESTIC SPOT MARKET:

The domestic spot prices exhibited a bearish trend as rising supply dominated the market throughout the week.

Major impact was seen in Central India where the weekly average of benchmark varieties of three major producing regions plunged by 1.8 to 2.5 percent. The Maharashtra (30mm) variety cotton plunged by Rs 970 or 2.5% to an weekly average of Rs 38,040/candy followed by Madhya Pradesh(30mm) variety down by Rs 720 or 1.9% to Rs 37,820/candy and Gujarat S6(30mm) down by Rs 660 or 1.7% to Rs 37,960/candy.

The fog has lifted and speculation of tight supply in relation to raised MSP by the Gujarat government on October 22 has completely faded away. Supply is on a potential upstream as daily cotton arrivals touched an estimate of 1.25 lakh bales on Friday and is likely to touch 1.5 lakh bales by Mid November.

New crop supply for the week (October 30-November 3) rose by 22 percent to 5.925 lakh bales compared to 4.53 lakh bales in the prior week (October 23-October 27) and was significantly higher compared to last year at 2.27 lakh bales which was a holiday shortened week on occasion of Diwali.

Farmer were selling their produce at good rates ranging between Rs 4,000-4,800/quintal, not just in Gujarat but other states were also more or less close to the raised MSP of Gujarat. The Gujarat government offered farmers Rs 500/quintal bonus on central government set Minimum Support Price (MSP) took the medium staple cotton MSP to Rs 4,520/quintal and long staple to Rs 4,820/quintal.

Since raw cotton prices were above central government set MSP, intervention of the cotton corporation of India(CCI) was not required but CCI did procure around 20,000 bales, on November 1, from farmers who were receiving rates below government set MSP. Further, farmers avoided the cumbersome procedure of selling their produce to CCI and preferred to sell to traders or directly to ginners with immediate payments.

On the demand side, there were some good inquiries on particular days across Maharashtra, Gujarat and North India. Local mills were actively procuring to replenish their inventories and after prices fell to Rs 37,500-37,800/candy earlier in the week. Further, good movement in the yarn market across Maharashtra and Ahmedabad also raised buying enthusiasm.

Exporters and MNCs were procuring in limited quantity or rather on routine demand basis of probably 1 lot or 100 bales everyday. This was especially evident in North India where an average of 1,300 bales(estimated volume) was sold on a daily basis.

As the week progressed, cotton began trading on fundamentals with prices witnessing marginal recovery attributed to good demand and good quality cotton arriving in the market.

Conclusion:

Supply dominated the prices which is clearly evident on the difference of the weekly averages. In the near term, prices were receiving support from routine buying and as more quality cotton arrives in the market.

Exporters/MNCs could likely turn active to meet their November/December shipments. Further, there is a potential for export sales to increase during November as Indian prices were trading at a discount compared to Cotlook Index A. Taking the Gujarat S6 30mm has the benchmark, the prices were trading lower 6 percent to 75.04 cents/lb compared to Cotlook Index A at 79.75 cents/lb as of Nov 3.

On the hand, supply has a potential to increase and if daily arrival crosses 1.5 lakh bales after mid-November then the routine buying would be temporarily held back, which will pressurise the prices. Further, global market sentiment shows bearish sentiment due to large crop prospects across major cotton producing countries.

Prices will continue to find support at Rs 37,500/candy and if exporters/MNCs do not become active during November then prices have a potential to breach the support level amid rising supply.



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