Cotton Weekly: Traders Eye WASDE Report Next Week

MUMBAI(Commoditiescontrol)- The ICE cotton futures traded in a tight range since Sept 13 while Indian market exhibits bearishness on large crop prospects.

US MARKET:

The ICE cotton futures ended the week relatively close to previous week levels but was marginally higher as Tropical Storm Nate brought some uneasiness to speculators.


The benchmark December contract settled at 68.84 cents/lb on Friday, ending the week marginally higher 0.39 cents(0.6%). However, the chart showed that despite breaching the bearish pennant pattern during the week, prices settled in a tight range of 132 points with the lowest of the week at 67.52 cents and highest at 68.84 cents.

Not just that, it was trading in a tight range of 257 point with low at 67.4 cents and high at 69.97 cents since Sept 13, just a day after USDA released the monthly WASDE report on Sept 12. The tight range trading explained that mill demand was providing support to the low at 67.4 cents and large crop prospects ranging between 20-22 million 480lb bales(25.6 to 28.2 million 170kg bales).

The next USDA WASDE report is due next week on Oct 12 and traders will be more focused on the production forecast to revise downward from 21.76 million bales as USDA will have included the assessment cotton impacted regions(Texas, Georgia, etc) post Hurricane Harvey/Irma. This would bring in fresh cues and breaching monotonous tight ranged trade.

What needs to be looked out for is which trendline(support/resistance) will prices breach post USDA Oct WASDE as this would decide the trend going forward. The Key support is seen at 67-66 cents while resistance at 70-71 cents.

Even if production is forecast to 20 million bales, there still remains ample of supply for the 2017/18 season. A temporary uptrend would be witnessed however eventually bearish trend would persist in which trade would put in short hedges against their stocks and on-call sales and a weak chart might force speculators to exit their long position.

CFTC Report as of October 3 showed Managed money liquidated their net long position for the third consecutive week to 51,232 lots, down 5,934 lots from prior week while non commercial speculators were at 50,935 lots, down 6,844 lots from prior week.

Meanwhile, USDA weekly net export sales declined 12 percent to 184,575 Running Bales(RB) for the week ended September 28 from previous week's 209,789 RB. Net shipments were recorded at 119,880 RB during the week (Sept 22-28) which declined 13 percent from previous week’s 137,846 RB.

Total commitment for the 2017/18 MY reached 7.90 million 480lb bales(53%) of USDA’s revised forecast to 14.9 million 480lb bales of which 1.46 million 480lb bales(10%) have already been shipped.

Meanwhile, the on-call sales commitment hit a record high as of Sept 29, there were a total of 13.61 million bales in unfixed on-call sales, of which nearly 7 million were on December and March. The difference between unfixed on-call sales and purchases is also at an extreme at 9.6 million bales.

The market seems to exhibit bearishness than bullishness at the moment with speculators were on long liquidation spree for the third consecutive week and if it persists then the market would be forced to go temporarily lower until December expires.

However, there is very key support at 65 cents level and prices have bounced off several number of times on probable mill fixations causing short covering since the last low indicating that unless 65 cents level is not breached, the situation cannot be concluded to complete bearishness.

CHINA MARKET:

China market remained closed on account of Autumn Festival between Oct 1-8.

INDIAN MARKET:

The Indian cotton futures settled marginally higher close to similar levels last week in low volume trade.


The benchmark October futures settled at 18,670/bale, up Rs 140(0.8%) over the week on Friday.

Open interest dropped 11 percent to 2,741 lots(68,525 bales of 170kg) indicating short covering.

Weekly technicals indicated that the nature of the price movement is sideways and oscillation around the Daily Reversal Value (DRV) at Rs 18,440.

The current movement appears to be like B structure and this would be confirmed if price breach Rs 18,000. This would further indicate downtrend to persist and next downside targets would be between Rs 17,133-16,060.

Consolidation around DRV would persist as long as 18,000 level is not violated strongly with bearish candle.

Key Resistance is placed at Rs 19,460 and if breached could persist rally. Inter week support is seen between Rs 18,447-18,067 while resistance is placed between Rs 18,827-19,207.

DOMESTIC SPOT MARKET:

Spot market persisted downtrend in the first week of the new cotton season 2017/18 as focus remained over large crop prospects.

It was a holiday shortened week as major trading began from Oct 3 onwards with prices on downtrend for the first two days and a minor recovery observed in the following days due to strong global cues.

However, despite minor recovery, the weekly averages of benchmark cotton variety showed major losses across the board.

Madhya Pradesh and Maharashtra witnessed the biggest downfall with the former incurred losses due to switchover to new crop while slack interest in old cotton stock weighed on prices.

The weekly average traded price(benchmark variety 29+MM) tumbled Rs 2,600/candy to Rs 38,000/candy while Maharashtra(old cotton 30MM) plunged Rs 1,740/candy to Rs 39,500/candy.

Most of the markets, except South India, be it old or new cotton, were trading in the range of Rs 36,800-39,500/candy which was in line with our predictions.

Large crop prospects ranging between 37-40 million 170kg bales amid gradually rising new crop supply and lackluster demand has brought a bearish sentiment in the market. Traders anticipate further downtrend in cotton market as supply flow reaches full potential by October end along with slight sluggishness in export inquiries, on forward basis, which has kept buying interest on a limited hand to mouth side.

Further, on-going sluggish phase in yarn trading activity due to slumber activity on the textile retail sector has served their limited buying enthusiasm.

There were some interest in forward deals, rates ranging Rs 37,000-38,000/candy, for November end/December delivery however overall buying sentiment was not encouraging.

New crop supply for the week(Oct 3-6) recorded a volume of 1.74 lakh bales of 170kg each, higher 21 percent from previous week(Sept 25-29) at 1.44 lakh bales and up more than 51 percent from same period in 2016 at 1.15 lakh bales showing early signs of positivity. However, this was the first picking crop which varied in quality and contained higher moisture level and was another factor in curbing buying interest for ready delivery.

As of Date, Total arrivals across the country reached 4.69 lakh bales which was significantly higher compared to 2.85 lakh bales during the same period in 2016. Raw cotton(kapas) rates ranged between Rs 3,500-4,500/quintal(quality dependent) and farmers were unsatisfied with prevailing rates hence have preferred to withhold second picking crop, which was significantly better in quality, in hopes of achieving a much better price.

The Cotton Corporation of India(CCI) is preparing to procure raw cotton if prices fall below Minimum Support Price(MSP) which ranged between Rs 4,020/quintal(Medium Staple) and Rs 4,320/quintal(Long Staple). CCI has assured the Punjab government that it would start procurement within a week if prices continued to trade below MSP while other states would after Diwali i.e Oct 23 onwards.

On the crop scene, Total cotton planting progressed to 122.59 lakh ha as of September 29 compared to same period last year at 102.79 lakh ha covering nearly 100.11 percent of the total normal area at 122.46 lakh ha and remained ahead 6.6 percent from the normal area as on date at 115 lakh ha. (Full Report)

Conclusion:



Bearish sentiment is likely to persist in the coming weeks as the country is expected to produce cotton estimates of 37 million bales with Trade estimates ranged between 37 to 42 million bales. However, some experts were stating that crop would not cross 35 million bales due to some regions in Maharashtra and Telangana may likely produce poor yields but those traders were in minority while majority were inclined to 37-40 million bales.

We believe that whatever takes place in the market the result is seen on the price trend and at present, prices persisted downtrend and forward basis was in discount compared to prevailing ready delivery prices. Hence, we find it difficult to digest the fact that crop would be around 35 million bales, creating a tight ending stock for the 2017/18 below 3 million bales amid average monthly consumption of 2.5 million bales.

But it is never wise to completely ignore such facts as we were still in early phase of harvesting and if mother nature plays the nemesis then it would be observed in the prices. The Ministry of Agriculture, in first advanced estimate, states cotton production to be down 2.5 percent at 32.3 million 170kg bales from 2016/17 at 33 million bales. While other agencies, including us, are estimating cotton production around 37 million bales.

Export forward deals were sluggish on account of premium new cotton basis compared to international cotton markets however, China is expected to resume cotton imports during the first quarter of 2018 in order to replenish their depleting inventories after a successful 2017 state reserve auction which keeps export sentiment optimistic.



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