PLEXUS Market Comments
Market Comments – May 20, 2021
NY futures continued to slide this week, with July dropping another 345 points to close at 81.53 cents, while December gave up 131 points to settle at 81.99 cents.
Traders have been scratching their heads as to why July has lost over 900 points in the last ten sessions, considering that export business has remained quite active and the US balance sheet is one of the tightest in years.
We believe that the abundant rains in West Texas are behind this steep decline, because they have motivated spec longs, and remaining trade longs, to exit the front month while it was still inverted to December.
Two weeks ago the July/Dec spread was still 386 points inverted, whereas it closed today at 46 points carry, a swing of 432 points. Before the situation in West Texas improved over the last couple of weeks, merchants may have considered holding on to their unsold inventory as an ‘insurance’ against a potential short crop next season, despite the lack of carry. This seems to be no longer the case and we have seen an increase in the certified stock from 95k to 122k over the last two weeks.
Similarly, speculators have been eager to capture the roll gain before it faded away and were therefore earlier than usual in moving their positions to December. Unlike index funds, who have a set schedule for their 5-day roll, speculators are free to move their positions at any time.
Open interest in July has been rapidly declining, as it measured just 85k contracts before today’s session, while that of December has increased to 101k contracts. In other words, we have seen an earlier than usual transition to December as the market leader. This compares to June 1 last season and May 31 two years ago.
US exports sales were about as expected last week, as 138,000 running bales of Upland and Pima cotton were added for both marketing years. Participation was still decent with 16 markets buying, while shipments of 353,100 running bales to 27 destinations were excellent.
For the current season we now have commitments of 16.6 million statistical bales, whereof 12.85 million have so far been exported. This compares to 17.3 million bales last season, of which 11.50 million had been exported at this point. With slightly more than 11 weeks remaining in the marketing year, shipments need to average around 294k running bales a week in order to reach the current USDA target of 16.25 million statistical bales.
West Texas continued to receive several inches of rain during the reporting period, which should allow for dryland plantings to get started. More rain will be needed along the way and fortunately the long-range forecast looks more favorable thanks to a warming of sea-surface temperatures in the Pacific Northwest and the Gulf of Mexico.
However, while there is certainly good reason to be more optimistic about the US crop, we should not lose sight of the fact that there is still a lot that can go wrong over the next five months. A year ago the USDA predicted a US crop of 19.5 million bales in its initial report and despite a good start we ended up with just 14.6 million bales.
The US dollar continues to lose ground, with the dollar index closing today near a 3-month low. The Chinese Yuan has strengthened from 6.57 at the end of March to around 6.43, which makes imports for China even more attractive.
US prices are once again competitive and enquiries from various markets, including China, have increased this week, especially since origins like Brazil or India have seen their basis firm up. Only Australian and West African remnants are still giving the US a run for its money, but remaining quantities from these competitors are not huge.
So where do we go from here?
As pointed out, the selloff has been mainly due to the rains in West Texas, which prompted July longs to roll to December in order to capture what was left of the inversion. This in turn has led to some technical weakness and snowballed into more selling.
However, given the amount of enquiries for US cotton and the fact that competitors like Brazil or India are not able or willing to join a price war, we feel that the market has very limited downside from here. While July could see some more weakness as it is entering its liquidation phase, we believe that December is a ‘buy’ at current levels.