US Cotton Weekly: Further Rise Can't Ruled Out On Bullish Cues

MUMBAI(Commoditiescontrol): The US cotton futures ended the week lower mainly due to sharp intra-day losses Tuesday on profit booking amid expected rain prospects over Texas and strong dollar, however the futures managed to offset some part of their losses helped by strong export sales report.

The benchmark ICE July cotton futures fell 3.1% on Tuesday in the biggest one-day percentage decline in over seven months, hurt by weaker demand and expectations of rain in Texas- the major cotton growing region in the United States.

The contract settled this weak down 0.25%, or 0.22 cents at 84.51 cents/lb. The contract earlier on Monday reach to 85.39 cents/lb, highest level since March 3. Open interest, as of April 26, showed 135,328 lots outstanding, rising 4.6% from prior week at 129,406 lots.

Total open interest for all contract increased 2.8% over the week to 265,991 lots. The spread between May-July strengthened to 82 points on Friday from 8 points last week. The July-December however weakened to 524 points versus 530 points last week.


The on-call sales position(Where mills purchase bales on-call but do not fix prices and in turn sellers/merchants, hedge themselves creating a short position on the futures market), as of April 13, reached 15.63 million bales(480lb) down 2.49% from prior week at 16.03 million bales and 2.67% lower from record high at 16.06 million bales as on March 15.

As of April 20, on call sales in May contract dropped 77% to 2.90 lakh bales (480 lb) and July rose 8.7% to 5.559 million bales and new crop December increased 2.28% to 3.61 million bales.

The May contract on-call position has significantly lowered this week due to commencement of notice period from April 24.

However, the on call sales report suggest market is on the side of speculators as mills have fix over 5 million bales on July over the next 7-8 weeks, indicating that current trade net short positions will have to get reduced substantially, while speculators may prefer to stay long and roll over position from July to cheaper December. Trade shorts are optimistic tracking last year's event, when speculators liquidated a 10.85 million bales net long down to just 1.3 million bales in a matter of eight weeks, starting in the middle of May.

Similarly, The CFTC report, dated April 24, showed Money managed players increasing their position 3.4%, over the week, to 82,871 lots and remained higher 25.2% from previous lows at 66,146 lots. On the other hand, the trade shorts rose over 4% to 173,008 lots as on-call position rose to near historical highs.

Feeding on the bullish bias is the robust weekly export net sales which reached 577,300 running bales(RB) for both marketing years combined. Shipments for the current MY showed was lot better at 427,921RB, during the week (April 13-19) which declined 15.26% from previous week’s 371,275. (Full Report)

For the current season we now have over 16.7 million statistical bales on the books, of which 9.9 million bales have already been exported. Commitments for shipment August onwards are already at 3.5 million statistical bales. This means that if the US were to ship the current USDA estimate of 15.0 million bales by July 31st, we would begin the new marketing year with already 5.2 million bales in commitments (1.7 carryover + 3.5 sales August onwards) and there are still nearly 15 weeks of additional sales data to go. This will likely be one of the tightest balance sheets we have ever seen in the US!

Assuming that speculators are not going to bail out of their net long anytime soon given the more optimistic outlook for commodities, it is difficult to envision how mills will escape their fixation trap. Similar to what happened last season. The mills have to fixed on call sales by July and thus volatility is expected to be on the side in cotton futures as tug of war between the bulls and bears likely to intense. It will be difficult to predict the direction, but speculators are in better position due to supportive fundamentals like weather concern in Texas. However, one should keep a close eye on dollar index as well, which may act as resistance, but unlikely to weigh prices significantly since technical and fundamentals seems to be positive.

TECHNICAL IDEAS

Traders long and holding the same can maintain the stop loss at 83.50. Once the breakout above 85.83 is successful then expect a rise to 89-90 or above.



(By Commoditiescontrol Bureau; +91-22-40015533)