Cotton Weekly: WASDE Was Not Ground Breaking!

MUMBAI(Commoditiescontrol)- USDA World Agricultural Supply Demand Estimates (WASDE) did not make a huge splash in the market as US continues to trade in consolidation.

Supply dominated Indian market as prices weakened for the second consecutive week however demand has a potential to revive in the days ahead.

China State Reserve auction for 2018 is scheduled to commence from March 12 onwards.

US MARKET:

The US ICE cotton futures continued to trade within the consolidated range of 66-70 cents for the eight consecutive week as USDA World Agricultural Supply Demand Estimates (WASDE) was unable to make a big splash in the market.

The benchmark December contract showed a negative weekly difference of 1.1 percent at 68.29 cents/lb until November 9 however witnessed recovery to show a positive weekly difference of 0.5 percent to 69.05 cents/lb.

The market continued to find support between 67.74-66.89 cents mainly due to trade short covering attributed to on-call commitments while speculator long liquidation limited upside at 69.16-70.22 cents.

The Goldman Sachs Index fund roll commenced on November 7 and will last until November 13. Heavy trading was observed throughout the week as total traded volume for all contracts rose 75 percent to 304,427 lots for the week(Nov 6-10) compared to prior week(Oct 30-Nov 3) at 173,426 lots.

The CFTC on call report, for the week ended Nov 3, showed December on call commitments declining 2,016 lots to 18,373 lots(1.837 million bales of 480lb bales) and it has been reduced during the current week ended Nov 10 which was evident on the price trend amid drop in open interest. The total all contracts on commitments rose 805 lots to 141,468 lots(14.15 million bales).

The above factors brought open interest for the benchmark December contract down 37 percent to 63,455 lots as of Nov 9 compared to 100,444 lots on Nov 2.

The USDA WASDE did not make a major splash in the market with surprising upward revision to US production to 21.4 million bales of 480lb bales(27.3 million 170kg bales) despite crop issues spoken of in Texas and Georgia. The yield is expected to be at record high of 900 lb/acre in harvested acreage of 11.5 million acres. (WASDE Report)

Despite hurricanes Harvey and Irma, some hailstorms and a hard freeze in West Texas the government has kept harvested acreage at 11.40 million acres and the national yield at 900 pounds, which would be 33 lbs/acre more than last year’s bumper crop!

Given all the problems Texas had this growing season it is difficult to believe that it is going to achieve a 5 lbs/acre better yield than last year, which was a phenomenal crop with hardly any issues.

The USDA weekly net export sales was above par at about 218,689 Running Bales(RB) for the week ended November 2. Net shipments were recorded at 131,494 RB during the week (Oct 27-Nov 2) which rose 42 percent from previous week’s 90,270 RB. Total commitment for the 2017/18 MY reached 9.13 million 480lb bales(63%) of USDA’s forecast at 14.5 million 480lb bales.

In order to reach USDA’s forecast, net sales were above the average weekly figures of 137,646 RB while shipments lagged behind compared to weekly average of 320,388 RB. (Full Report)

The market seems settled between the price band of 66-70 cents and USDA WASDE behind us, the market will not likely be affected with any other major reports until December’s first notice day on November 24. A fresh price trend could be observed if prices breach the consolidated trade range.



Technical Ideas(Dec): Prices have not breach the range of 70.22-66.89 hence next directional movement will be seen when prices breach this consolidated range. The demand zone is seen between 67.51-67.65 while the upside breakout is above 70.22 and traders should hold long only prices breach 70.22. Resistance is seen between 69.37-70.22 while support is seen 67.95-66.89.

CHINA MARKET:

The ZCE Futures traded in a tight range for the third consecutive week with the benchmark January contract experiencing major short covering.

The benchmark ZCE January futures settled at 15,185 yuan/tonne on Monday, tad higher 0.5 percent from Nov 3 amid 14 percent decrease in open interest to 165,324 lots indicating major short covering.

China harvest progress(Nov 6-10) reached 88.1 percent which was higher 3.1 percent from same period last year. The Ministry of Agriculture brought a minor downward revision to production estimated at 5.32 million tonnes(31.3 million 170kg bales) due to heavy rains in Jianghan. (Full Report)

The National Development and Reform Commission(NDRC) announced that the State Reserve would conduct another season of cotton auction scheduled to commence from March 12, 2018 onwards. (Full Report)

The market speculates that China has an estimate of 5 million tonnes remaining in their inventories and there are possibilities of rise in import demand from China during the first quarter of 2018.



Technical Ideas(Jan): Sideways movement continued with near term resistance at 15,265 and support at 15,090, either side breakout could signal a fresh trend.

If cotton prices trade above 15,265 and opening price on Monday then buy with a low of the week as the stop loss or 15,090 whichever is lower. The 61.8 percent retracement of the fall from 16,015-14,850 is placed at 15,560. On sustained rise and close above 15,265 then expect prices to rally toward the retracement level of 15,560.

Traders short need to maintain stop loss at 15,265 while traders can trade long for near term pullback on sustained rise and close above 15,265.

INDIAN MARKET:

The Indian cotton futures persisted sideways trend for the second consecutive week.

The benchmark December futures settled at 18,170/bale on Friday, slightly lower Rs 50(0.3%) over the week. Open interest increased 2 percent, over the week, at 3,948 lots(0.99 lakh bales of 170kg).

Prices were trading in tight 32 points or Rs 320 band of a low at Rs 18,100/bale and higher at Rs 18,420/bale on the daily chart indicating that the market has found a good near term support and resistance.



Technical Ideas(Dec): Weekly technical report showed bandwidth is falling indicating sideways and contracting movement. The weekly chart showed that prices were trending within a tight Rs 18,000-18,700.

Traders holding short can revise the stop loss to Rs 18,360 as prices could witness a pullback if it closed above the stop loss level with a bullish candle. Weakness is seen below Rs 18,100-18,000.

Inter-week support is placed between 18,073-17,853 and resistance at 18,293-18,513.

DOMESTIC SPOT MARKET:

The domestic spot prices showed weakness for the second consecutive week as supply dominated the market.

Major impact was seen at Lower Rajasthan, markets of Central and South India, as weekly averages declined close to or more than 1 percent. The benchmark variety at Lower Rajasthan declined over 2 percent to a weekly average of Rs 37,250/candy.

In Central India, Gujarat S6(30mm) declined nearly 1 percent to a weekly average of Rs 37,740/candy, Madhya Pradesh declined 1 percent to Rs 37,440/candy. In South India, the two major producing cotton market plunged 1 to 1.2 percent to an weekly average of Rs 37,570-37,910/candy.

The cotton market traded on fundamentals with supply dominating the market despite followed through buying.

New crop supply for the week(Nov 6-10) rose 9 percent to an estimated volume of 6.465 lakh bales compared to 5.925 lakh bales in the prior week(Oct 30-Nov 3) and was significantly higher compared to last year at 4.34 lakh bales.

Farmer were selling their produce at good rates ranging between Rs 4,000-4,800/quintal, not just in Gujarat but other states too and was more or less close to the raised MSP of Gujarat. The Gujarat government offered farmers Rs 500/quintal bonus on central government set Minimum Support Price(MSP) took the medium staple cotton MSP to Rs 4,520/quintal and long staple to Rs 4,820/quintal.

Demand could be summed up as a routine hand to mouth basis, as buyers were cautious to make huge lot deals in anticipation that prices would persist downtrend as supply gradually increases in days ahead. Daily new crop supply touched 1.335 lakh bales, highest this season, with potential to touch 1.5 lakh bales by mid to end November.

Demand from MNCs/Exporters was limited or routine demand basis and has a potential to grow as the export parity of domestic cotton is lucrative compared to the benchmark Cotlook Index A.

Taking the Gujarat S6 30mm has the benchmark, the prices were trading lower 8 percent to 73.28 cents/lb compared to Cotlook Index A at 79.35 cents/lb as of Nov 10.

Local mills were finding prevailing rates supporting their sentiment hence were procuring to replenish their inventories. The movement in the yarn market also was on a routine demand basis hence rates were stable as of November 9. (Price List)

Meanwhile, since raw cotton prices were above central government set MSP, intervention of the cotton corporation of India(CCI) was not required but CCI did procure around 85,000-90,000 bales, as of Nov 10, from farmers who were receiving rates below government set MSP.

Further, farmers avoided the cumbersome procedure of selling their produce to CCI and preferred to sell to traders or directly to ginners with immediate payments.



The USDA WASDE has little impact to Indian cotton prices as the agency kept Indian balance sheet unchanged from prior estimates. Production is estimated at 384 lakh bales, slightly higher than our estimates of 371.1 lakh bales.

The ending stock is overstated as USDA records for Aug-July period while Indian season begins from Oct to Sept. Considering, average monthly consumption at 2.5 million bales, then the ending stock for the season is revised to 13.2 million bales, which in fact is still overstated. As per our balance sheet, collated from various recognized trade sources, the ending stock for 2017/18 is estimated at 4.6 million bales.

Conclusion:

The scenario witnessed no major changes from previous week as supply continued to dominate prices with some support from routine demand.

Demand has a potential to grow mainly from MNCs/exporters until then rising supply could keep a lid on cotton prices. Key support is seen at Rs 37,000-36,500/candy.

Further, the world cotton consumption is estimated to rise 4.4 percent to 152.5 million bales of 170kg compared to last year which will support export prospects.

Prices will continue to find support at Rs 37,000/candy and if exporters/MNCs do not turn active during November then prices have a potential to breach the support level amid rising supply.



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