Plexus Market Comments 10 Jun
Posted : June 15, 2021

PLEXUS Market Comments

Market Comments – June 10, 2021

NY futures continued to push higher this week, as July gained 315 points to close at 87.36 cents, while December advanced 317 points to close at 88.21 cents.

December has now rallied over 700 points since posting a low of 80.99 on May 14 and it settled today at a contract high close of 88.21 cents, surpassing its previous record of 87.66 cents set in late February. Strong export demand for nearby delivery combined with an uncertain new crop outlook are providing fundamental support, while a bullish chart is luring speculators back into the market.

Today’s WASDE confirmed that both the US and global balance sheets are tightening, as US exports increased by 150k bales this season and 100k bales in the next marketing year, which drops US ending stocks to just 3.15 million bales at the end of July and an even tighter 2.9 million bales by the end of next season.

When we look at global numbers, we see a widening seasonal production gap next season, as mill use is expected to exceed output by 3.67 million bales, up from 2.04 million bales last month. However, all of this increase is occurring in China, where the seasonal production gap is expected to increase by 1.75 million to 14.25 million bales.

In the ROW we actually have a slight increase in the production surplus, as it is expected to rise by 120k bales to 10.58 million bales. Since the USDA expects the ROW to ship 11.0 million bales to China next season, it will draw down ROW stocks by a modest amount to 53.73 million bales.

While these 53.73 million bales in ROW stocks would be slightly lower than the 54.44 million bales of this season, they are still considerably above the long-term norm. For example, in the two seasons prior to the pandemic, the ROW managed just fine with 44.4 million (2018/19) and 43.1 million bales (2017/18). So why does it feel like we are about to run out of cotton despite the statistics telling us otherwise?

We believe that supply chain disruptions are one possible explanation. Shipment delays and the scarcity of vessels in some parts of the world have forced mills to increase their buffer stocks. Just-in-time delivery doesn’t cut it in the current environment and mills are forced to work with larger inventories.

While cotton that is ‘pulled forward’ leaves the origin faster than it otherwise would have and thereby creates this tight feeling, we need to be careful not to automatically put it down as consumption. If mills were to increase their buffer stocks by let’s say 30 days, then we would expect to see higher ending stock numbers among major importers.

So far the statistics are not reflecting this, since ending stocks at “major importers (minus China)” are shown at just 10.83 million bales for the current season, down from 11.89 million bales last season. In other words, we believe that some of these bales that are currently counted as ‘mill use’ actually belong to the ‘ending stocks’ column.

US export sales of 133,500 running bales of Upland and Pima cotton were quite good, considering that only around 700-800k bales remain uncommitted in current crop. There were just 13 markets buying last week, while shipments of 275,100 RB went to 23 destinations.

Total commitments for the current crop are now at 17.1 million statistical bales, of which 13.9 million have so far been exported. With 8.3 weeks of reporting left in the marketing year, shipments will have to average around 295k running bales a week in order to make the revised export estimate of 16.4 million bales.

US crop weather was a mixed bag this week, with West Texas finally warming up into the 100s after all the rain in recent weeks, while parts of the Midsouth were inundated with flooding rain.

Some counties in Arkansas and Mississippi received over a foot of rain, which has caused some damage to emerging crops. We have already seen a reduction in cotton acreage in the Midsouth due to higher grain and soybean prices and this will further reduce the count. Our guess is that there will be 10-15% fewer cotton acres this season.

So where do we go from here?

With the US nearly sold out and with other origins like Brazil and India experiencing very strong local markets at the moment, the fundamental side of the equation looks bullish.

Mills are eager to book readily available supplies, since new crop is still mired in uncertainty and supply chain disruptions persist. This ‘bird in the hand is worth two in the bush’ attitude continues to fuel the market and the only selling we see is scale up grower hedging.

The chart is in bullish mode as well and after dumping over 3 million bales in net longs last month, speculators are now buying the market again. With the macro side still in ‘risk on’ mode, the path of least resistance remains higher for now and the next upside target for December is the Feb 25 intra-day high of 89.28 cents.

Longer term a lot depends on whether production lives up to expectations or whether we suffer setbacks. This weather market will have traders nervous over the coming months and keep short sellers at bay, but if crops turn out as expected, then we should have plenty of cotton available to keep the market contained.

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