Cotton Weekly: Uncertainty of Gujarat Crop Makes Bear Uncomfortable

MUMBAI(Commoditiescontrol)- Crop concerns in Gujarat has awoken the bulls in the Indian market however on speculations while US market trades range bound in thin volume during the week ending July 28.

US MARKET:

The US cotton futures traded range bound with the benchmark December contract marginally higher 38 points at 68.8 cent/lb while next month March tad higher 12 points to 68.23 cents/lb over the week.



There was nothing ground breaking in the market except the robust export sales report which brought in some intraday fireworks however prices corrected back to the tight range trading on Thursday. Total trade volume, for all contracts, dropped to 77,087 lots for the week ending July 28 from 89,646 lots in the previous week which showed the lethargy in the market.

The market is still stuck between a bullish near-term reality being the tight supply scenario and a bearish long-term projection of large world ending stock for 2017/18 season at 88.72 million 480lb bales(113.5 million 170kg bales).

Demand continued to provide support to cotton prices at 67 cents/lb shown on the robust USDA weekly export sales where new sales for 2017/18 MY rose 38 percent to 236,388 Running Bales(RB) and surprisingly merchants squeezed 28,600 Running Bales(RB) for the 2016/17 MY. (Full Report)

Shipments strengthened by 3.35 lakh RB to touch 14.03 million RB(14.41 million 480lb bales) and may push USDA to revise exports upward to 14.7 million 480lb bales in the August WASDE report.

This would take US ending stock at 3 million 480lb bales and historically, there were few seasons in the past 50 years where ending stock levels have fallen below 3 million 480lb bales. According to experts, 1990/91-season had the lowest carryover in recent history with just 2.34 million 480lb bales.

The total export commitments for both Marketing Year would reach 6.3 million 480lb bales which excludes new commitments of the remaining 11 days until end of July to reported in August 3 weekly export sales report. Assuming, total commitments would touch 6.5 million 480lb bales and season’s mill consumption at 3.4 million bales, then the low-level ending stock would not be sufficient to meet fourth quarter needs.

The tight supply scenario may be keeping the speculators, on the heels, expectant of another price spike breaching the 70 cents strong resistance levels. The deciding factor of the tight supply would be on the maturity levels of the new crop.

The 4 percent drop in good to excellent category of the Texas crop condition caught the speculators attention of possible higher abandonment rate from the previous 7 percent recorded in June. Reports suggest, other states’ crop condition were in superior condition and if weather conditions remain supportive for the remainder of August, then US could likely touch production figures ranging between 18.5-19 million bales.

Louis Rose, our close friend in the US, who is an analyst at Rose commodities, reports excellent yield potential across areas of Texas and Georgia, and after his recent crop tours of the Midsouth territory the crop in this region has potential of better yield.

CHINA MARKET:

The ZCE cotton futures exhibited a downtrend with the benchmark September falling to a fresh low on long liquidation on Friday.

The benchmark September contract settled at 14,760 yuan/tonne on Friday, plunging 590 yuan/tonne over the week. Open Interest, as of July 27, declined 11 percent over the week to 140,466 lots amid sharp plunge of 4.3 percent or 655 yuan to 14,885 yuan/tonne indicating major long liquidation.

Reports of additional 4.41 lakh tonne(24.12 lakh 170kg bales) to be auctioned from the massive State Reserve may have likely weighed on the market sentiment.

Meanwhile, the state reserve auctioned a total of 147,992 tonnes from which it sold 80,945 tonnes for the week ended July 28 touching a weekly turnover at 55 percent.

Since the commencement, around 2,080,550 tonnes (12.34 million 170kg bales) were sold from the total offered quantity of 3,065,638 tonnes (18.03 million 170kg bales). (Full Report)

INDIAN MARKET:

The Indian cotton futures rallied an overall of 3 percent in past one week to settle on the higher side for the second consecutive week due to speculation of crop damage in Gujarat.

The benchmark October contract on MCX futures settled higher 3.4 percent (610 points), over the week, to Rs 18,440/bale on major speculative buying as open interest increased 4 percent to 2,112 lots (0.53 lakh 170kg bales).

The expiring July contract settled higher 2.7 percent(540 points), over the week, to Rs 20,820/bale on major short covering as open interest dropped 54 percent to 1,800 lots(0.18 bales). There might be certain buyers who would be interested to take delivery as the spot-futures basis was almost on equal level.

The inverse spread between the old crop July and new crop October marginally lowered to Rs 2,380/bale from Rs 2,490/bale in the previous week.

Further, strengthening rupee against dollar, which closed at 64.135 on July 29 from 64.385 on July 21 may have influenced rally in prices.

DOMESTIC SPOT MARKET:

Spot market persisted downtrend for the second consecutive week(July 24-28) with the average weekly benchmark prices of, different markets ranging between Rs 41,800 recorded in Rajasthan while the highest level of Rs 44,220/candy recorded in Andhra Pradesh/Telangana.

The market was on a downslope picking off from previous week with the major losses observed in the Madhya Pradesh market, plunging Rs 760/candy, to record a weekly average at Rs 42,830/candy. The North India followed a similar trend, dropping Rs 60-70/maund, recording a weekly average ranging between Rs 4,390-4,410/maund(Rs 41,900-42,100/candy).

Losing streak lasted merely for few days at the beginning of the week as crop concerns in Gujarat due to excess rains causing floods which eventually became the center of attention in the market. The market sentiment is slowly tilting to a bullish stance which pushed market participants off trading ring, halting downtrend in the market.

Heavy speculations on the magnitude of damage is aimlessly looming over the market which nudged the bulls to return with the first wave of influence on the futures market which rallied nearly 3 percent in July and 3.5 percent in the new crop October.

Riding the speculative trend, North India cotton spot prices was the first to rebound to a 10 session high, recovering nearly 50 percent of the previous week losses. (Full Report)

However, steady trend persisted in Gujarat, where only tentative rates were quoted, and Maharashtra, witnessing marginal fall of Rs 50 to a weekly average at Rs 43,650/candy.

There was some panic buying in North India however in limited quantity while no trade was reported in Central and South India.

Gujarat recorded largely excess rainfall during the week(July 20-26) with actual levels touching 176.5mm(7 inch) which more than double of normal levels at 54.1mm(2.1 inch). Nearly 4 districts in the Saurashtra, which covers 70 percent of the total Gujarat sowing area, experienced largely excess rainfall and speculations of 30 percent damage loomed over these areas. (Full Report)

Rajasthan is the other state which experienced above normal levels of rainfall recorded at 112.8mm(4.5 inch) and these rains may superficially prove beneficial for procuring higher yields for the 5.2 lakh ha area of cotton sown. However, we recommend keeping a close watch on how weather condition pans out next week over Rajasthan. Meanwhile, other states received favorable levels of rainfall supporting crop growth.

Cotton planting reached 111.56 lakh ha as of July 27 compared to same period last year at 92.33 lakh ha covering more than 91 percent of the total normal area at 122.46 lakh ha and remained significantly ahead 10 percent from the normal area as on date at 101.55 lakh. (Full Report)

No doubt the sowing progress has gradually slowed down from previous week but it was nothing to be alarmed.

The old crop supply was gradually depleting as expected and as per the data collated from market sources, arrivals for the week(July 24-28) dropped 54 percent to 16,400 bales of 170kg from 35,700 bales in prior week (July 17-21) with the average daily arrivals falling to 3,300 bales from 7,000 bales. The total supply figures of old crop almost touched 33 million 170kg bales which was 98 percent of the estimated 2016/17 season’s production at 33.7 million bales as of July 20. Arrivals may have touched 33.2 million bales as of July 30.

Conclusion:

Speculation of crop damage in Gujarat has woken the bulls and they are eagerly waiting for the official reports to pound on the bears. We took the initiative to make an early analysis of the market from the perspective of the speculators and if the 30 percent damage holds true then cotton production in the State of Gujarat may reach last year levels ranging between 7.5-8 million bales of 170kg. (Full Report)

The damage would create a short-term rally however, better production in other states will eventually stomp over the bulls, demolishing yet another bull rally efforts.

However, concluding on various speculations is always a risky state of affair and should be ‘taken with a grain of salt’. Official assessment of the Gujarat crop may likely begin from next week, at least in Saurashtra and we would keep you updated analyzing the final possibilities of crop production.

Taking the benchmark Gujarat Shankar 6 30mm as the benchmark of the price trend analysis, the first resistance is seen at Rs 44,000/candy for near term while a strong resistance placed at Rs 45,500/candy, with the later seemingly out of reach. The Gujarat S6(30mm) is trading at Rs 42,650/candy(84.84 cents/lb) as of July 28.

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