PLEXUS Market Comments
MARKET COMMENTS – 16 DECEMBER, 2021
NY futures continued to rally this week, as March gained 309 points to close at 109.68 cents.
After settling the previous eight sessions in a tight range of just 122 points, between 105.79 and 107.01 cents, March bounced from this base today and the buying accelerated after Monday’s high of 107.82 was taken out. Volume jumped to 31k contracts, after it was confined to below 20k lots in the previous seven sessions.
Open interest dropped by about 2.4k to 232.6k contracts since last Thursday, as specs were light sellers into scale down trade buying. The latest CFTC report showed that in the 9 weeks between October 5 to December 7, speculators had reduced their net long positions by 3.47 million bales, from 11.45 to 7.98 million bales.
This has allowed the trade to reduce its net short exposure by 3.76 million bales, from 19.75 to 15.99 million bales. A lot of that net short is connected to unfixed on-call sales, which are still sizeable as today’s CFTC report has shown.
As of last Friday there were still 14.35 million bales in unfixed sales overall, which was up 0.15 million bales from a week earlier. March had 5.60 million bales open, while there were 2.13 million bales on May and 4.58 million bales on July.
On the purchase side there were just 3.95 million bales unfixed overall, whereof 1.10 million on March. The net difference in favor of unfixed sales amounted to a still sizeable 10.39 million bales overall and 4.50 million bales in March. With just about two months to go before March is history, this translates into a lot of underlying support.
US export sales were once again quite strong at 343,400 running bales of Upland and Pima cotton for both marketing years combined. Participation was widespread with 22 markets buying and 23 destinations receiving shipments of 140,000 running bales. While the pace of shipments is improving, it is still far below the 369k weekly average needed to make the current export projection of 15.50 million bales.
Total commitments for the season are now at 10.65 million statistical bales, of which just 2.85 million bales have so far been exported. That’s 2.3 million bales less than a year ago! Unfortunately the supply knot is only slowly untangling.
On Wednesday the Port of Los Angeles informed that the average ‘wait at anchor’ was 20.7 days, down only slightly from the peak of 20.9 days in early December. There were still 102 ships anchored, up from 86 in mid-November, when the new ship queuing system was introduced.
There were still 71,000 empty containers at various depots and terminals on port property. The street dwell time, or the number of days it takes a truck chassis and container to leave the port and return, was at a high of 10 days. In other words, it will likely be a while before we can expect cotton shipments to reach the pace of previous seasons.
With the CPI rising at an annualized rate of 6.8% and the PPI climbing at an even stronger 9.6%, the Fed was finally forced to take a slightly more hawkish stance in an effort to combat inflation. The Fed is accelerating its tapering of bond purchases, reducing them to USD 60 billion by January and then by a further USD 30 billion in the following two months, with the program ending in March. The Fed is also expected to raise interest rates three times in 2022.
The market reacted favorably to the Fed’s decision, because it removed an uncertainty and it was seen as the right step to combat inflation, which has risen to a 39-year high. This positive market vibe played an important role in cotton’s rally today!
So where do we go from here?
After building a base for the last two weeks, the market took off today, which should take any further spec selling out of the game for now and might invite some new buying, both from the spec sector as well as mills, who seem to have missed an opportunity to fix a bigger portion of their March exposure.
However, since we are not dealing with a typical supply shortage, but more of a delivery shortage, there should still be plenty of cotton in the system over the coming 6-12 months. Therefore, as mentioned last week, mills will not just pay any price for current crop futures, considering that December will take over as the reference month in six months from now.
December will likely start to act as an anchor to current crop futures, not letting them stray too far from new crop values. Maybe current crop prices are justified at 105-110 cents, but then December is too cheap and will need to catch up. Or current crop futures will eventually trade lower towards December. The market will have to figure this out over the next six months, but we believe that we will see this massive gap between current and new crop futures narrow considerably over time.