Plexus Market Comments 27-May-2021
Posted : June 15, 2021

PLEXUS Market Comments

Market Comments – May 27, 2021

NY futures recovered some ground this week, with July gaining 108 points to close at 82.61 cents, while December added 196 points to close at 83.99 cents.

The recent drop in prices has sparked a decent amount of new business in US recaps, as well as attractively priced Australian and African styles. Although yarn prices have softened somewhat along with falling cotton prices, spinning margins have stayed positive and demand from the downstream sector remains strong.

US export sales amounted to a better than expected 277,500 running bales of Upland and Pima cotton for all three marketing years combined. Participation was great with 19 markets buying, while shipments of 341,000 running bales to 21 destinations were about 50k bales above the average needed to make the USDA export projection of 16.25 million statistical bales.

Commitments for the current season have reached nearly 16.8 million statistical bales, of which 13.2 million bales have so far been exported. Meanwhile sales for the 2021/22-season are just under 2.0 million statistical bales, which is about 0.9 million bales less than in the previous season.

The US statistical picture continues to tighten, as supplies of 21.85 million bales in the current marketing year are reduced by commitments of 19.1 million bales (exports + domestic use), which leaves just 2.75 million bales. From that we need to subtract another 1.5 to 2.0 million bales to feed export and domestic needs in the August to October time frame, before new crop starts to fill in.

In other words, there might be less than a million bales still available for sale in US current crop and the market will therefore be sensitive to any crop issues during the growing season. Fortunately the outlook has greatly improved after several weeks of rain in West Texas, with Lubbock measuring around 4 inches since May 1. More is needed along the way, but for now the dryland crop has a lifeline.

These rains have done two things to the market. For one, they have tempered the speculative fervor and we are no longer hearing any talk about ‘dollar cotton’. As a result we have seen a drop in volatility in out-of-the-money call options and we expect premiums to come under further pressure. Second, growers and merchants are now more willing to put on some short hedges against new crop, which is adding to overhead resistance.

The most recent CFTC spec/hedge report showed that spec selling was responsible for the market’s steep drop from 89.74 cents to a low of 82.00 cents during the week of May 12-18. Speculators sold 1.01 million bales net and reduced their net long to 5.74 million bales, while Index funds cut their net long by 0.25 million to 8.11 million bales.

The trade was a strong buyer during this decline, reducing its net short position by 1.26 million to 13.85 million bales.

Speculators have dropped their net long by 2.56 million bales since early March and while the latest round of selling was probably related to the improved situation in West Texas, what may have curbed the enthusiasm among speculators as well is that China has started to clamp down on commodity speculation.

A few days ago the National Development and Reform Commission (NDRC) and several other government departments warned that there would be zero tolerance for “price fixing, hoarding or any speculative activities that put upward pressure on commodity prices”. They asked companies to maintain orderly prices and to be aware of the bigger economic picture.

Chinese speculators have definitely played an important role in goosing up US commodity futures in the recent past and they now have to be more careful in how they play their game going forward.

So where do we go from here?

The improved US crop outlook has calmed the market and from a statistical point of view prices in the low-to-mid 80s seem fair. The USDA currently has a 2.04 million bale global production gap for the 2021/22-season, while Cotlook predicts a similar 2.42 million shortfall.

Since global beginning stocks are estimated at 93.16 million bales, a small production gap won’t worry the market. Sure, US stocks are tight, but there is enough cotton around the globe and as long as there are no major production hiccups, the market should stay relaxed.

However, since demand is quite decent at current levels and we are only at the beginning of a long weather market, we don’t see much downside in the near future and still feel that December has more upside potential than downside risk.

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