Cotton Weekly: WASDE in Line With Market Expectations

MUMBAI(Commoditiescontrol)- WASDE October remained in line with market expectation and did not make much of a splash compared to September/August while the Indian market traded higher side on weather scare.

US MARKET:

The US ICE cotton futures ended the week marginally lower as the USDA World Agricultural Supply Demand Estimates(WASDE) was in line with market expectations.

The benchmark December contract settled at 68.62 cents/lb, on Friday, ending the week marginally lower 0.22 cents(0.3%).

Prices continued to trade in a sideways pattern for the fourth consecutive week in the range of 67-70 cents/lb, since Sept 13. During this period, price challenged the key resistance level of 70 cents on intraday basis however was pulled back on selling pressure to close lower.

The support at 67 to 67.5 cents seemed to be triggering short covering attributed to mill fixations as open interest is persistently declining and since Sept 13, it has declined 17 percent to 123,670 lots. The CFTC Report confirmed the short covering from trade shorts which declined 13 percent to 136,262 lots as of Oct 10.

The resistance at 70 cents is triggering selling, mainly from speculators and managed money players. The CFTC report showed 25 percent declined in managed money position to 52,169 lots.

The bias is favoring the bears more now amidst large crop prospects domestically and globally.

The much awaited USDA WASDE October forecast was in line with market expectations post Hurricane Harvey/Irma assessment where US production is forecast at 21.1 million 480lb bales(27 million 170kg bales), down 3 percent from prior overstated forecast of 21.76 million bales(27.8 million 170kg bales), but remained higher 23 percent from 17.17 million 480lb bales production in 2016/17 season. The average yield is forecast at 889 lb/acres, which was historically the second highest figure. (WASDE Report)

Further, exports witnessed downward revision of 2.7 percent to 14.5 million 480lb bales which kept ending stock at 5.8 million 480lb bales. The market, us included, believe that export figures has a potential to witness upward revision in the months considering rise in global consumption and anticipation of higher imports from China during the first quarter of 2018.

The USDA weekly net export sales marginally lowered 4 percent to 176,411 Running Bales(RB) for the week ended October 6 from previous week's 184,575 RB. Net shipments were recorded at 122,271 RB during the week (Sept 29-Oct 6) which declined 13 percent from previous week’s 119,880 RB. Total commitment for the 2017/18 MY reached 8.08 million 480lb bales(56%) of USDA’s forecast at 14.5 million 480lb bales which lowered in the October WASDE report.

In order to meet USDA’s forecast at 14.5 million bales, exporter sales need to be about 150,000 bales of 480lb while shipments need to touch 300,358 bales of 480lb. Judging the past 9 weeks’ performance, net export sales remained ahead while shipments lagged behind.

Confirming the short covering attributed to mill on-call fixations, the on-call sales commitment declined 53,600 bales of 480lb, week on week, as of Oct 6, to a total of 13.56 million 480lb bales for all contracts. From the total figure, December declined nearly 15 percent to 2.72 million 480lb bales since Sept 8 and dropped 6 percent from previous week.

With large domestic crop prospects, it seems that December will find it difficult to breach the key resistance of 70 until expiration. Speculators still hold a large position and with various bearish factors in play, they have a potential to go on a selling spree and reach the low open position seen on July 18 at 18,655 lots.

The large on-call position seems to be providing a good support to the market however as seen in the last season, mills can hold off fixing their on-call commitments if prices have more downside potential. Hence, bears seem to be more superior at the moment with key support at 67 cents and at 65 cents.

CHINA MARKET:

The ZCE Futures exhibited bearish trend as it resumed trading after a long autumn festival holidays.

The benchmark ZCE January futures settled at 15,060 yuan/tonne on Friday, down 0.6 percent from Sept 29 amid 11 percent increase in open interest to 212,912 lots indicating short covering.

The market resumed trading on a weaker note to settle at 15,040 yuan/tonne, down 0.7 percent from Sept 29 settlement at 15,150 yuan/tonne. It traded in a tight range of 235 yuan throughout the week recording an intraweek low at 14,955 yuan/tonne and intraweek high at 15,190 yuan/tonne.

WASDE kept China’s balance sheet unchanged with production at 24.50 million 480lb bales, imports at 5.10 million bales and ending stock at 39.47 million bales.

Meanwhile the ministry of agriculture raised production forecast to 5.35 million tonnes for 2017/18 season, up 11 percent from 4.82 million tonnes in 2016/17. (Full Report)

The National Development Reform and Commission set 2017/18 import quota at 897,000 tonnes, unchanged from 2016/17.

Technicals are close to oversold levels with prices trending below the 14-day exponential moving average and simple moving average. Further, prices were nearly retracing downward levels of 14,941 yuan/tonne(78.6%) which acts as an immediate support level.

INDIAN MARKET:

The Indian cotton futures settled higher on speculative short covering amid excess rains delaying new crop supply.

The benchmark October futures settled at 18,970/bale on Friday, up Rs 300(1.6%) over the week. Open interest dropped 31.7 percent to 1,872 lots(46,800 bales of 170kg) indicating major short covering.

The market witnessed a sudden upsurge and breached the key resistance at Rs 19,460 however selling pressure pulled back prices to close lower two consecutive sessions on Thurs-Friday.

Weekly technicals indicated that the nature of the price movement is upward however candlestick pattern showed a bearish close on a weekly basis. Rally could persist if weekly close is above 19,600.

Until then, we recommend to exit long on rise from 18,970-19,600 as the opportunity rises. Inter week support is seen between Rs 18,567-17,647 while resistance is placed between Rs 19,487-20,407. (Technical Report)

DOMESTIC SPOT MARKET:

Spot market traded on the higher side this week with prices of various benchmark varieties increasing nearly nearly 1 to 2 percent on weather scare across Central India.

Average traded price of central India markets increased more than 2 percent over the week with Madhya Pradesh up 2.6 percent to Rs 39,050/candy followed by Gujarat increasing 2.2 percent to Rs 39,380/candy, old crop Maharashtra higher 1.9 percent to Rs 40,340/candy while new crop in Maharashtra surged nearly 3 percent to Rs 39,450/candy.

As we previously mentioned in our weekly report to never underestimate Mother nature and this held to be true as she is willing to throw one last punch to cotton crop through excess rains across Central India, hampering harvesting progress and delaying new crop supply of quality cotton by 8-10 days.

Amongst the three major producing states of Central India, Maharashtra received 49 percent higher of 64.1mm of rains compared to normal levels of 43.1mm during Oct 1-11 period. Meanwhile, Gujarat and Madhya Pradesh received light rains on regular intervals.

Excess rains across major producing districts of Maharashtra brought about weather scare delaying new crop supply creating a tight supply scenario in the market which temporarily shifted the sentiment to a bull side.

Due to the above factor, some spinning mills showed interest in procuring very limited stock of old crop, mainly in Gujarat, where prices of old crop rose Rs 1,000/candy(2.6%), to an average traded price at Rs 40,00/candy since Oct 1 when it traded at Rs 39,000/candy.

New crop supply witnessed minor sluggishness early in the week however quickly recovered in a single day on Friday when it touched the highest volume of 62,000 bales. New crop supply for the week(Oct 9-13) rose 25 percent to 2.77 lakh bales compared to 2.22 lakh bales in the prior week(Oct 3-6).

North India progressed to second stage of harvesting progress where the quality of crop is significantly better compared to the early arrivals during August end. Due to better quality of crop, farmers restricted offloading at lower rates which ranged between Rs 3,800-4,300/quintal creating another phase of tight supply scenario across North India raising raw cotton(kapas) rates to a maximum selling price of Rs 4,950/quintal as of Friday.

Further, the weather scare supported their asking rates as well. CCI was supposedly to begin procurement if raw cotton rates fell below MSP of Rs 4,020/quintal(Medium Staple) and Rs 4,320/quintal(Long Staple) however did not require to intervene as prices were trading well above MSP. The potential of raw cotton rates progressing upwards is much higher at the moment with farmers expecting prices to cross Rs 5,000/quintal.

The market sentiment at the moment was exhibiting a bullish bias however as prevailing weather conditions were forecast to clear next week onwards along with rise in supply pressure and farmers across North India would find it difficult demanding higher than Rs 5,000/quintal.

As of Date, Total arrivals across the country reached 9.01 lakh bales which was significantly higher 77 percent compared to 5.07 lakh bales during the same period in 2016. Raw cotton rates in other states, ranged between Rs 3,500-4,500/quintal(quality dependent). The market lacked good quality cotton and as weather conditions improve next week onwards, the quality of stock arriving in the market will also improve which would pressure cotton prices.

Meanwhile, USDA raised India’s imports by 18 percent at 2 million 170kg bales from previous WASDE forecast while exports were raised 9.3 percent to 5.9 million 170kg bales, while production and ending stock remained unchanged at 38.4 million 170kg bales and 18.7 million 170kg bales, respectively. However, except production, all other figures were stated for Aug to July period while the normal season is between Oct-Sept.

If we consider ending stock for Oct-Sept period then it should be around 0.9 million 170kg bales as per USDA which seems overstated while as per our balance sheet ending stock is forecast at 0.5 million 170kg bales which is ample stock.

Conclusion:



The market witnessed temporal bullish sentiment due to weather scare and this will cool off as forecast suggest dry and hot temperatures to persist next week onwards. Further, trade activity will likely remain on a lower side during Oct 18-22 as the country will be on a vacation mood on occasion of Diwali.

Bearish sentiment will eventually topple the bull on factors such as rise in new crop supply, lackluster demand from spinning mills due to limited yarn activity, limited export forward inquiries and large global production estimates of 154.6 million bales(up 13% from 2016/17) and ending stock of 118.1 million bales(up 3% from 2016/17) across to USDA WASDE.

Indian cotton price was trading significantly lower compared to Cotlook Index A during early October however, at present, is trading almost closer to Cotlook Index A. As supply increases, Indian cotton prices will decline and become more lucrative for international buyers but this could probably be seen during the month of November.



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