CFTC: Cotton on Call Report: Sharp Jump In July Volumes

Cotton on Call Report: Sharp Jump In July Volumes

Mumbai (Commoditiescontrol): Friday April 1 2016

Introduction to Cotton on Call Report

Cotton on Call report is released by US Commodities Futures Trading Commission (CFTC) week on week every Thursday evening. The report shows the quantity of call cotton bought or sold or contracted to buy or sell in the New York spot cotton market. Price however for call cotton is not fixed. Price is fixed later based upon the future month’s price.

Call cotton means physical cotton which is either bought or sold or it is under contract to buy or sell. Data is reported as unfixed call sales or the amount of cotton sold for which price is not fixed.

Unfixed call sales contract is undertaken between the cotton merchant and mill owner. The cotton merchant sells cotton and the mill owner buys cotton. At the time of the contract, quantity and period for delivery is fixed. However price, which is decided by the mill owner, maybe fixed or may not be fixed. If the price is fixed then the merchant undertakes a long position in either futures or options on ICE for equivalent amount. The merchant holds this position till the time he receives the payment from the mill owner and on receipt of payment he squares off his futures or options position. If the price is unfixed then the merchant does not undertake any position in the futures or options till the time the price is fixed. Prices have to be fixed latest by one day before the futures contracts first notice day for delivery.

Unfixed call purchases contract is undertaken between the cotton merchant and the grower of cotton. The cotton merchant buys cotton from the grower. At the time of the contract, quantity and period of delivery is fixed. However price, which is decided by the grower, maybe fixed or may not be fixed. If the price is fixed then the merchant undertakes a short position in either futures or options on ICE for equivalent amount. The merchant holds this position till the time the entire transaction is settled with the grower and squares off his futures or options position. If the price is unfixed then the merchant does not undertake any position in the futures or options till the time the price is fixed.

The difference between the price at which the merchant purchases cotton from the grower and sells to the textile mill is the profit or loss made by the merchant. This difference is price is called the basis price.

Cotton on call report published by CFTC tries to capture the amount of cotton futures or options which could be purchased or sold by the merchant for the given futures contract on ICE. Using this we can make an estimation of price movement in the given futures or options contract and also get a view into demand and supply of physical cotton in New York spot market.

Unfixed Call Sales



Unfixed Call Sales (Data from 26 February to 24 March) Source: Cftc.gov

July unfixed call sales volumes picked up sharply for week ended 24th March. July volumes increased by 13.40 percent week on week this week as compared to a 3.96 percent increase in the previous week. December volumes too saw a larger increase by 22.95 percent for week ended 24th March as compared to a 4.40 percent increase in the previous week. March 2017 volumes also shot up by 11.51 percent week on week for week ended 24th March as compared to the previous week increase of 4.54 percent. May volumes which had declined by 1.06 percent in the previous week saw volumes increase by 3.26 percent for week ended 24th March.



Total Call Sales (Data from 26 February to 24 March) Source: Cftc.gov

Total call sales volumes improved vastly when compared to the previous week. Infact, call sales volumes reached the same levels seen for week ended 29th January 2016. However they still remain far lower when compared to December 2015 volumes. Increase in volumes week on week was 10.89 percent or 5724 lots compared to 2.97 percent or 1516 lots last week. Majority of the additions for week ended 24th March was once again seen in July and December 2016 contracts with additions of 2298 lots and 2332 lots respectively. March 2017 contribution was moderate at 695 lots as compared to 262 lots the previous week.

Unfixed Call Purchases



Unfixed Call Purchases (Data from 26 February to 24 March) Source: Cftc.gov

July unfixed call purchases too shot up for the week ended 24th March by 97.32 percent. The previous week had seen only a 5.49 percent increase. December call purchases continued to increase this week as well. Rate of increase moved up to 9.62 percent from 2.09 percent seen in the previous week. May contracts however saw purchases decline. Week on week decline in purchases was 12.63 percent as compared to a 5.67 percent increase seen in the previous week.



Total Call Purchases (Data from 19 February to 24 March) Source: Cftc.gov

Total Call Purchases volume continued to pick up for a fifth week in a row. Increase in week on week volume was 2724 lots as compared to 616 lots increase last week. Maximum contributors to increase in volumes was July, being the old crop future, which increased by 2507 lots. In the new crop futures only December contract saw additions by 859 lots. However May contract saw drop in volumes by 642 lots.



Total Call Sales to Purchase ratio continued to decrease for the third week in a row to 2.84 percent from 2.96 percent in the previous week as rate of addition to purchases was larger than that of sales.

Prices and Open Interest



Prices on ICE Futures (26 February to30 March) Source:Reuters

Average price for the month of March in May futures was 57.49 cents. Average price for the current week until yesterday has dropped to 57.82 cents. Average price for week ended 24th March was 58.16 cents higher also from the average price of 58.07 cents for the week ended 18th March.



Open Interest of ICE Futures (26 February to30 March) Source:Reuters

As prices started to increase from the lows open interest in the May contract has been decreasing while increasing in July and December. This mostly indicates that the rally in May is mostly based on short covering while that in July and December are seeing accumulation of long positions but in very small numbers. Sharp addition to open interest was noted to the July contract on 30th March.

Impact

Sharp jump was seen both in unfixed call sales and unfixed call purchases for the month of July which is the last month for the old crop. Addition to purchases in July at 2507 lots was larger than addition to sales which was at 2298 lots. In the futures market open interest in July has been increasing with a sharp increase seen on 30th March. Increase in activity along with open interest clearly points to prices being firm for the month of July.

Unfixed call sales also increased in December and March by large amounts. While unfixed call purchases increased only in December. Thus textile mills are getting more active in the market and first signs of demand picking up are being seen after period of low activity for four weeks in the new crop futures.

Merchants are more robust in demand for the old crop and are yet to increase their purchases in the new crop.

May outlook continues to be dull as rally in prices is clearly being seen in short covering and buying sentiment is yet to come back in the market.

As average prices for the week, which will end today, is likely to be lower than the previous week, increase in sales volume in the next cotton on call report would somewhat establish a floor for prices and a possible rebound in the May futures.

Until then we continue with our view of price to increase in July and a possible change also in the price outlook for the remainder of 2016 if volumes continue to pick up in the next report as well.

(By Commoditiescontrol Bureau; +91-22-40015523)