PLEXUS Market Comments
MARKET COMMENTS – November 04, 2021
NY futures ended a volatile week higher, as December added another 273 points to close at 116.46 cents. The Dec/March inversion widened from 190 to 355 points.
After breaking out from the triangle formation at around 109 cents last week, the December contract shot straight up to a high of 121.67 cents on Tuesday, before finally letting off some steam and pulling back. The highest settlement price so far has been Monday’s 119.84 cents.
Open interest has remained stubbornly high during this latest advance, as total OI was down just 2.5k to 284.2k contracts over the last five sessions, although December’s OI declined from 104.3k to 82.4k contracts. This compares to 107.3k contracts last year and 109.1k two years ago.
It therefore looks like the potentially explosive December situation has been defused somewhat, especially since the GSCI index roll is still ahead of us next week. This should provide enough liquidity to square away most of the remaining Dec positions and prevent shorts from getting into deeper trouble. Although merchants typically don’t want mills to roll their on-call sales down the calendar, shipment delays may have allowed for a greater than usual number to be postponed to March.
Today’s CFTC on-call report showed that as of last Friday there were still 2.87 million bales in unfixed sales on December, down just 0.27 million bales. This number has probably dropped considerably during the price spike earlier this week, since December open interest dropped by a combined 1.35 million bales on Monday and Tuesday.
Total unfixed on-call sales increased by 0.24 million to 16.32 million bales, whereas total on-call purchases were up 0.07 million to 4.55 million bales. The difference in favor of sales increased to a record 11.77 million bales net. Mills are apparently still convinced that the market will give them an opportunity to fix their contracts at a lower price.
While anyone who needs ready supplies has no other choice but to pay the current asking price, the downstream sector is starting to resist this rising trend in cotton prices. We also doubt that end users will readily accept higher prices in the current economic environment, in which a large part of the population is getting squeezed by higher energy and food prices.
This seems to be more of a ‘supply chain’ than a ‘supply’ issue, which is evidenced by the fact that cotton at destination is fetching a higher relative basis than at origin. Uncertain shipping schedules, container shortages and volatile freight rates have created a ‘bird in the hand is worth two in the bush’ situation and it is still anyone’s guess as to when it will normalize again.
US export sales were behind the recent pace last week, as 193,300 running bales of Upland and Pima cotton were sold for both marketing years combined. China was still the largest buyer with 50,700 RB, followed by Turkey with 39,100 RB. In total there were 16 markets buying, while 20 destinations received 149,500 RB in shipments.
Total commitments for the current season are now at 9.05 million statistical bales, whereof just 2.0 million have so far been exported. They still lag behind last year’s sales of 9.55 million statistical bales and 3.45 million bales in shipments.
The slower buying pace by China is probably a reflection of the narrowing spread between the two markets. While China’s spot futures have been hovering in the low-to-mid 150s for the last couple of weeks, US futures have been closing the gap from around 46 cents to the current 36 cents, which has taken away some of the arbitrage incentive.
Next Tuesday we will get another set of WASDE numbers, which we expect to show higher US and global production numbers and slower mill use due to higher prices and supply disruptions. Judging by various news reports from Texas to the Carolinas, where some growers talk about “exceptional” and “once in a lifetime” yields, we should see a larger US production number. How large remains to be seen, but somewhere in the 18.5-19.0 million bales range makes sense to us.
The Indian subcontinent is expected to harvest slightly better than expected yields, with the Cotton Association of India estimating the crop at 36.0 million local bales, or about two percent higher than last season. Pakistan is also looking at a much improved crop of around 8.5 million local bales.
We have global production at 120.5 million bales, with an increase in the ROW (all origins except China) of 11.8 million bales over last season. This should be close to cover the import needs that China has, which the USDA in its last report estimated at 10.5 million bales, although we feel that China will take in at least 13 million bales this season.
So where do we go from here?
We are still in a situation in which some trade shorts in December (mainly related to mill fixations) need to buy, while spec longs are still in no hurry to part with their positions. This might lead to further price spikes, as shorts are forced to pay up to entice sellers.
However, once December is out of the way, we expect there to be a temporary lull in buying, as mills won’t rush in to fix their March on-calls yet. This should allow values to retreat into the holiday period.
We also feel that the economy is facing headwinds, as no additional government stimulus is imminent and the Fed is finally starting to reduce its bond purchases, which should put upward pressure on interest rates. This will likely slow an already sluggish economy further and could lead to a ‘risk off’ move in asset markets.
While China, speculators and supply-chain issues have been fueling this rally since late September, we don’t see this as a lasting situation and feel that it is prudent to prepare for when the tide is turning.