Cotton Weekly: Explosive Bull Run in US Keeps Global Market Sentiment Bullish

MUMBAI(Commoditiescontrol)- US cotton market persisted winning streak for the ninth consecutive session and Indian market neared Rs 41,000/candy level as the market focused on the demand.

US MARKET:

The US cotton on the ICE futures persisted strength for the ninth consecutive week as spec buying and bullish options strategies by the trade continue to feed this explosive bull move.

The benchmark March contract settled at 77.87 cents/lb, on Friday, up 2.6 percent over the week. Open interest as of Dec 21 showed 172,505 lots outstanding, higher 1 percent from prior week at 170,723 lots.

The market witnessed an explosive bull run on December 21 as the benchmark March closed at upper limit level of 3 percent at 77.94 cents/lb, setting a new contract high and 7 month high on the continuous chart.

Prices have been on an uptrend since Nov 15 and major speculative buying has caused an uptrend as March contract rose more than 900 points during this period. Prior to Nov 15, we mentioned that the rising trade shorts amid large on-call commitments lacked the support from the speculators to create another tug of war similar to last season. That has now turned into reality, as speculators have heavily invested in agri-commodities especially cotton.

This is clearly evident in the latest CFTC report, dated December 12, during the period(Nov 14-Dec 19), Managed money players(Hedge fund) added a massive 132 percent to their net long position at 97,675 lots, where by the long only position increased 75 percent to 104,866 lots and shorts decreased 60 percent to a mere 7,191 lots.

Similarly, the non-commercials, categorized as speculators, raised net long position by 108 percent to 92,038 lots where long only position rose 66 percent to 109,852 lots and short only position reducing 19 percent to 17,787 lots. Speculators tend to stay in a strong uptrend until there is confirmation of a reversal and at the moment there are no signs of reversal.

The major reason behind the large long open position by the speculators is due to the large on-call commitments which has now increased 1.7 percent, week on week, to nearly 15 million bales of 480lb bales as of Dec 15. The major chunk of outstanding on-call commitments is seen in March at 5.5 million bales(38% of total on-call commitments) followed by May at 2.97 million bales(20%) and July at 3.07 million bales(21%).

The large on-call commitments were from mills who have yet to fix their price over the quantity of cotton they have agreed to purchase. This was in line with the large export commitments which is at 11.15 million bales as of Dec 14. The persistent rise in weekly export net sales showed strong demand abroad. (Full Report)

The 4 percent expectant increase in world demand at 119.59 million bales as per USDA is gradually proving to be true amid large export demand. Further, lower than anticipated production in India, world’s largest cotton producer and quality issues post pink bollworm attack has shifted export demand to US.

There were some technical indicators which also fed on the speculative bull move as prices breached the key 200 Moving Average on November 20.

Since there are no signs of trend reversal in the near term as the market is trending more on demand rather than the large availability of cotton. The market is confirmed going to witness the classic tug of war between the trade shorts and speculator longs.

Last season, technical indicators suggested a long term target to 90 cents and that happened during mid May when prices touched a synthetic high of 88 cents after which witnessed heavy profit booking. This season, the target has shifted to 95 cents and when this could happen is yet unclear.

At the moment, prices could touch just shy of 82 cents and profit booking is expected on every rise.

Technical Ideas(March): The trend is up and higher price range of 78.92-82.12 could be challenged along with volatility. Hence, higher range can also be used to book profits.

CHINA FUTURES MARKET:

The ZCE Futures closed lower for the second consecutive week on major short selling.

The benchmark ZCE January futures settled at 14,935 yuan/tonne on Friday, down 1 percent from Dec 15 amid 17.6 percent rise in open interest to 306,286 lots.

Rumors of China raising their import quota seems to be far from true as a trade source confirmed that unless the State reserve depletes most of the remaining stocks at above 5 million tonnes and the prevalent import quota of 8.94 lakh tonnes is likely to suffice the current season.

Technical Ideas(May): Unwinding volatility is more dominant as the recent movement in prices. The strategy is to exit long position from 14,935-15,200 as the opportunity arises. This was due to violation of long position stop loss placed at 14,870 as the prices fell to a low of 14,800 during the week.

Sideways volatility is being witnessed around the Daily Reversal Value(DRV) at 15,009. Support is placed between 14,650-14,800 and near term pullback can be seen if prices breach 15,200.

INDIAN FUTURES MARKET:

The Indian cotton futures persisted rally to record a new contract high in January contract as traders raised their long position during the week.

The benchmark January futures settled at 20,120/bale on Friday, higher Rs 150(0.8%) over the week. Open interest increased 24.5 percent, over the week, at 7,325 lots(1.83 lakh bales of 170kg).

Technical Ideas(January): Major addition of long position was witnessed during the week which raised prices to new contract high and recorded a bullish candle. Hence, expect higher range of 20,243-21,133 to be tested. Traders long can maintain a stop loss of 19,600.

INDIAN SPOT MARKET:

In physical trade, spot prices persisted winning streak for the fourth consecutive week amid sustained demand, trimmed Indian cotton production and bullish global futures exchange.

Tentatively, weekly averages of the benchmark cotton variety surged nearly Rs 800/candy(2%) across major cotton trading markets. The 2 percent thrust in prices was mainly on heels of explosive bull run on the US cotton futures market on December 21. (Full Report)

Other supporting factors shortage in premium variety cotton across two major producing states, namely, Maharashtra and Telangana post pink bollworm(PBW) eating nearly 30-40 percent of the total cotton planted area of both states at 61.14 lakh ha(42.06+19.08 lakh ha). However, the year on year increase in cotton area has compensated thereby reducing the magnitude of crop production loss when compared to last year.

In our special report, we trimmed Indian cotton production by 9 percent to 350 lakh bales of 170kg each from initial estimates of 385 lakh bales however remains higher from last season’s production at 330 lakh bales. (Full Report)

Imports were revised to upwards of 25 lakh bales, exports are reduced to 60 lakh bales thus ending stock is revised to 40 lakh bales, similar to levels of 2016/17. From the quantity perspective, the ending stock is sufficient to meet near term requirements of next season however the questionable factor is the quality.



The country is expected to face quality rather than quantity issues which is the reason behind upward revision of imports this season. Hence, demand from local spinning mills remained average to meet their immediate requirements. Some premium variety buying shifted to Gujarat and Madhya Pradesh due to quality issues in Maharashtra.

Exporters were the major buyers in the past two and half months as they were rushing to meet their delayed commitments. Shipments for the season reached 7.1 lakh bales for the first two months of season which was surprisingly ahead 25 percent from last season’s 5.7 lakh bales despite Reverse Charge Mechanism(RCM) and quality issues.

Major chunk of the shipment was to Bangladesh, China, Vietnam and Indonesia. Exporters were shipping average quality lint to Bangladesh in the price range of 80-85 cents/lb while premium variety lint was gradually being shipped to other destinations in the price range of 76-80 cents/lb.



Export prospects still has a potential to grow as the ex gin spot prices were in discount by 7 percent at 81.38 cents/lb(Guj S6 30mm ex gin) compared to Cotlook Index A at 88.6 cents/lb. China is expected to book huge import orders from January onwards as the yearly import quota of 8.94 lakh tonnes is renewed from January onwards.

On the supply side, cotton crop supply for the week(Dec 18-22) rose 16.3 percent to an estimated volume of 8.115 lakh bales compared to 6.98 lakh bales in the prior week(Dec 11-15) and was marginally lower 3 percent compared to same period last year at 8.38 lakh bales. Supply in 2016/17 was gradually returning to normalcy after ginners resorted to digital payments post demonetization.

The tightness in supply in the current season is soon reaching the surface as farmers were withholding their produce in anticipation of better rates upwards of 5,300/quintal. The prevalent raw cotton rates were in the range of 4,300-5,300/quintal as of December 22.

Total new crop arrivals, since Oct 1, has reached 93.285 lakh bales, up 19 percent from same period in the previous year at 78.67 lakh bales.

Conclusion:

The market has headed towards the Rs 41,000/candy level mainly on heels of bullish global market sentiment. The bull steam in the global market is not likely to slow down anytime soon as global consumption is expected to increase 4 percent to 153 million bales of 170kg as per the balance sheet drawn by USDA.

Prices have witnessed a sudden upsurge in the past few weeks and near term correction is due soon.

The irking factor is that around 74 percent of the total estimated production at 350 lakh bales is yet to arrive in the market, which is huge sum of supply and on the other hand demand has been not that great either.

Supply has not yet reached the full potential of daily arrivals clocking 1.8 to 2.0 lakh bales and if it does reach those levels then it could pressurize prices in the month of January. This points to a rather bearishness if we look from the supply perspective.

But the reality is that farmers were not interested in offloading their stocks at lower rates and their holding capacity in the recent years has increased. Further, prices were trending in line with the trend of the global market most of the times if not always and in anticipation of lower than anticipated production.

The question remains is that whether the market trends on the quality issues or will supply dominate keeping the bull steam limited, only time will tell!

The beginning of 2018 will lift the veil over the availability of premium variety cotton. The key support on cotton prices is placed at Rs 38,000/candy and resistance is now shifted to Rs 43,000/candy.



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