PLEXUS Market Comments
MARKET COMMENTS – AUGUST 12, 2021
NY futures spiked higher this week, with December gaining 264 points to close at 93.32 cents.
A surprisingly bullish WASDE report sent the December contract to new intra-day (93.85 cents) and settlement (93.32 cents) highs today and we are getting close to a breakout on the weekly chart as well.
The highest close for a nearby contract this year was 93.69 cents on February 24, while the intra-day high was set at 95.60 cents a day later. Before that we have to go back to June 2018, when the spot month reached an intra-day high of 96.50 cents and a settlement high of 95.21 cents. The highest point since the epic bull market of 2011 has been the March 2014 intra-day high at 97.35 cents. Those are all levels we need keep an eye on!
Traders got blindsided by an unexpectedly low US crop estimate this morning, as the USDA’s 17.26 million bales was nearly a million bales below the consensus. We struggle to understand this low number, since the crop condition index is at its highest reading in five seasons, while the USDA predicts the average yield at just 800 pounds/acre, which would be 66 pounds/acre below the five-year average.
Seen over a ten-year period this would mark the second lowest yield, with only the 766 pounds/acre of the 2015/16-season being worse. Sure, the crop is a week or two late in many places, but thanks to the recent hot weather we have seen good progress and heat units are starting to catch up.
Based on the fairly optimistic field reports we have seen, we believe that the potential to achieve an above average crop still exists. However, for that to happen we probably need an Indian summer and hope that there won’t be another early freeze in West Texas like last season.
The rest of the WASDE numbers didn’t contain any surprises, as global beginning stocks were raised by 0.21 million bales, while global production was cut by 0.55 million to 118.84 million bales and mill use was raised by another 0.17 million bales to 123.33 million bales.
This increases the seasonal production gap to 4.49 million bales, but since endings stocks are still projected at 87.23 million bales (71% of global use), whereof 52.39 million bales (42.5% of global use) are outside China, there should be enough cotton to get by, at least from a statistical point of view.
However, at the moment the market feels a lot tighter, with ready supplies seemingly exhausted and mills, along with the entire downstream sector, eager to get their hands on cotton and products. We believe that a combination of supply chain disruptions and inventory build-ups is causing this panic-like demand surge, as shipments are often 2-3 months delayed, which forces mills and retailers to double-book in some cases and/or grab anything that’s readily available.
This may turn out to be a double-edged sword though, because if retailers don’t have full shelves, then less cotton will get consumed. Therefore, while prices may spike further in reaction to this ongoing supply squeeze, we could end up with a different market if Northern Hemisphere crops were to come in without major setbacks and the supply chain normalizes. However, there is still a lot of uncertainty on both counts and this is keeping prices well supported for now.
Strong US export sales were another supporting element today, as a total of 339,500 running bales of Upland and Pima were sold last week. Participation was strong with 18 markets buying and China leading the pack with 132,600 running bales after a long absence at the top. Shipments continued to lag, as just 242,800 running bales were shipped to 20 destinations.
For the 2020/21-season we ended up with total exports of 16.1 million statistical bales, although the USDA lowered its export number in the WASDE report by only 0.05 million to 16.35 million bales. This difference of 250k is bales likely due to underreporting of shipments in the weekly export reports, which will later get rectified by the Census data.
There were 1.44 million statistical bales carried over to the 2021/22-season, which lifted total commitments to 5.05 million statistical bales, of which 0.2 million bales have so far been exported. This compares to 6.65 million bales in commitments and 0.3 million bales shipped a year ago. In other words, the US still has some catching up to do in terms of sales, but we first need to know what this crop is going to produce.
So where do we go from here?
The market continues to push higher on speculative buying and now possibly some upside protection buying by trade shorts as well.
Unfixed on-call sales continued to rise and were at 14.23 million bales last week, or nearly ten million bales higher than unfixed purchases. This continues to add fuel to an already fiery market!
There is nothing to suggest that this uptrend is going to get derailed anytime soon and new multi-year highs are now in sight. For the market to reverse we need speculators to start trimming their positions, but there is currently no reason for that.
However, we always need to be on the lookout for potential trouble ahead. What could trip up the rosy economic scenario is the renewed flare up of Covid due to the Delta variant, with the US experiencing a sharp rise in hospitalisations and China today closing the world’s third largest port because of a Covid incident. Market bubbles are priced for perfection, but there are definitely some needles out there!