PLEXUS Market Comments
MARKET COMMENTS – DECEMBER 2, 2021
NY futures collapsed since our last report of November 18, with March losing 1144 points to close at 103.70 cents.
Since posting an intraday high of 118.50 cents on November 17, the March contract has dropped nearly 15 cents in just ten sessions. It settled today just slightly above the 50% Fibonacci retracement of the move from 88.36 to 118.50 cents, which is at 103.43. cents.
March open interest dropped to 137.1k contracts as of this morning, which is down markedly from 156.5k contracts on November 17. This tells us that spec long liquidation has been driving this selloff, while mills have been in no hurry to fix their on-call contracts as the latest CFTC report shows.
As of last Friday, when the March contract was already down to 111.41 cents, unfixed on-call sales on March actually increased by 0.04 million to 6.87 million bales, while total unfixed on-call sales were down 0.26 million to 15.41 million bales. This drop was mainly due to the clearing out of remaining December positions, which accounted for 0.23 million bales.
The CFTC spec/hedge report for the week of November 17-23, during which March declined from 118.50 to 114.60 cents, showed only the beginning of spec long liquidation, as their net position dropped by just 0.13 million to 9.88 million bales. Since then they have probably reduced their net long to somewhere around 8.5 million bales.
Index funds had an 8.34 million bale net long position (down 0.08 million), while the trade remained considerably net short at 18.22 million bales (down 0.21 million). So far the trade’s patience seems to pay off, but it is too early to call an end to this bull run. The 2010/11-season has shown that a bull market can suffer through steep corrections, only to bounce back even stronger.
US export sales were better than expected during the Thanksgiving break, with 381,300 running bales of Upland and Pima finding a home in 17 markets, as Vietnam and China accounted for a combined 72% of the total. Shipments continued to limp behind, as just 73,700 RB were exported to 14 destinations.
For the season we now have commitments of 9.95 million statistical bales, of which only 2.55 million bales have so far been shipped. Compare that to last season, when 10.60 million bales were sold and 4.50 million statistical bales had been exported. We are running almost two million bales behind in shipments and would need to export 356k running bales a week to reach the current USDA estimate.
Unfortunately, the pace of shipments is not likely to improve significantly over the coming weeks, as the US supply chain remains clogged. While there are plenty of empty containers available, there is a currently a shortage of chassis and trucks, plus the ports are still overwhelmed.
With container imports running about 15-20% above the volume of previous years, it is comparable to adding more cars to a highway during rush hour traffic. 20% more cars on the road don’t just slow the flow by 20%, but can cause jams and grind traffic to a halt.
Once the holiday season is behind us, we expect the supply chain to finally normalize, but it is questionable whether US exports can speed up to nearly 400k bales a week for the remainder of the season.
Many origins are experiencing similar problems, as we hear of many shipments being delayed by 2-3 months. This has caused mills to pay inflated prices for readily available cotton, since they need to keep their factories running, but once all this backed up cotton starts moving, we might see the burden shift to the other end and cause supply pressure.
So where do we go from here?
Speculators have started to reduce their net long and it remains to be seen whether their exodus will continue or whether they suddenly find renewed interest in our market. A lot will depend on the macro situation and whether financial markets can keep their composure. So far investors don’t seem too concerned as they are still buying the dips.
However, we need to remind ourselves of what happened in 2018, when a sharp stock market correction led to a steep selloff in the cotton market, as speculators turned a 12.2 million net long position into a 2.8 million net short within a six-month period.
For now this still has to be treated as a correction in a primary uptrend, which won’t be in jeopardy until prices drop into the mid-90s. The 50% Fibonacci retracement at 103.43 and the October 13 low of 101.31 cents are the next support points and as long as they hold, we expect to get a decent bounce out of this oversold market.