Mumbai (Commodities Control) – Cotton #2, for the holiday-shortened week, pared all its gains on Thursday- the last trading session for the week ended 1st April. Most-active May futures settled 49 points or 0.62% lower because of the sharp decline witnessed on Thursday. This turned out to be the sixth straight weekly decline for NY Cotton, as ICE Cotton May futures ended at 77.95 Cents per lb, down 293 points. May-July spread stands at 132 points vs 103 in the previous week.
Last week, the ICE May cotton contract declined 430 points or 5.08%, to finish at 80.38 cents/lb.
During the latest week, ICE cotton futures slumped more than 3% on Thursday as a U.S. government report showed a sharp slide in weekly export sales.
Having said so, speculative action has been one major reason behind slippery prices in cotton. The weekly data release from CFTC showed cotton spec funds were 54,135 contracts net long on 30th March, down 5,056 contracts. Long side positions decreased by 4,464 contracts, while short side positions witnessed a rise of 592 contracts. The open interest for the week was registered at 290,770 contracts vs 285,758 contracts last week.
On Thursday, the ICE Cotton contracts for May 21 Cotton closed at 77.95, down 293 points, Jul 21 Cotton closed at 79.27, down 290 points and Dec 21 Cotton closed at 77.91, down 219 points. It is to be noted that this week May futures closed just 4 points above ICE Cotton December, while the July-Dec backwardation narrowed to 136 points vs 667 points around five weeks back.
Fundamentally, traders were hoping to see another round of outstanding sales, given the recent low in old crop prices. In fact, China canceled a sizable lot and shifted other bales to Vietnam. Its action may be considered punitive to the Biden administration. Recently, the U.S., the UK, Australia and Europe have been pushing China on her alleged slave labor situation. There was also a huge cancellation for Indonesia.
The U.S. Department of Agriculture's weekly export sales report showed that net sales of 78,400 running bales (RB) for 2020/2021 were down 71% from the previous week, while exports of 324,700 RB were up 4%.The report showed that sales to China were at 13,500 RB, including decreases of 24,200 RB, while sales to Vietnam were at 97,300 RB, which included a switch of 13,600 RB from the top consumer.
Meanwhile, Pakistan's cabinet on Thursday put off allowing imports of cotton and sugar from neighbouring India until Delhi reviews its 2019 move to revoke the Kashmir region's special status, the foreign minister said.
On the bullish side, we can say that the US cotton balance sheet continues to tighten, West Texas weather conditions are still unfavourable, the economy is still rebounding, the S&P500 closed at a new record high and competing crops have been rallying in reaction to the Prospective Plantings report.
USDA’s Prospective Plantings report was “middle of the road”. The report said that farmers intend to plant 12 million acres of cotton this year– 0.5% less or essentially the same as last year. Pre-report industry expectations were mostly 11.5 to 12.5 million acres. USDA’s earlier unofficial estimate from its Outlook Forum was 12 million acres.
The report showed that all cotton planted area for Texas, the top U.S. cotton producing region, was estimated at 6.82 million acres, slightly lower than last year's 6.84 million acres.
Some experts are of the opinion that demand optimism has eroded somewhat and weekly exports are seen as a barometer. Higher prices will require strong demand. The market will balance demand with the outlook for the US crop. USDA’s next monthly supply-demand estimates will be out next week on April 9th and the market will keep a keen eye on it.
Many cotton analysts see a lacklustre chart and price action and forecast further weakness in the front month.
However in the longer term, with December cotton in view, prices are expected to head higher.
Michael Seery of Seery Futures notes that the volatility in cotton is set to expand. With U.S markets entering the summer months he believes the 95 cents level will not remain the high in 2021’.
He adds, “I think prices look cheap as I think the downside is very limited. The next major level of support is all the way at the 75.00 level..”
Support and resistance for Cotton #2 lies at 75.30 and 82.84 cents per lb, respectively.
The cotton markets were closed on April 2 for the Good Friday holiday, but will resume normal trading from Sunday night.
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