PLEXUS Market Comments
MARKET COMMENTS – 23 DECEMBER, 2021
NY futures moved slightly lower this week, as March gave back 56 points to close at 109.12 cents. The July/Dec inversion settled at 1359 points, down from 1478 points a week ago.
March had a rocky start to the week, when it traded all the way down to a low of 104.27 cents on Monday. Since then it rallied by nearly 500 points on some trade short-covering and possibly light spec buying as well.
However, trading was slow all week and overall open interest actually declined by 0.3k to 232.3k contracts, with March open interest was down 2.5k to 118.6k contracts. In today’s session we traded less than 10k contracts, which was the lightest volume since last Christmas. In a strong market we would like to see increasing volume and rising open interest, and that’s not the case at the moment.
The CFTC report for the week of Dec 8-14, during which March traded in a sideways range between 105.01 and 107.82 cents, showed only minor changes in the respective positions. Speculators sold 0.09 million bales net to reduce their net long to 7.89 million bales, while the trade bought 0.03 million bales to cut its net short to 15.96 million bales.
Today’s CFTC on-call report showed a small reduction in March on-call sales, which dropped by 0.20 million to 5.40 million bales, while unfixed purchases on March were down 0.07 to 1.03 million bales. Overall on-call sales were down just 0.04 million to 14.30 million bales, while overall on-call purchases were down 0.03 million to 3.93 million bales.
US export sales maintained their strong pace last week, as another 300,200 running bales of Upland and Pima cotton found a home in 20 different markets. However, shipments continued to underperform, as just 135,600 running bales were exported to 19 destinations.
For the current season we now have commitments of 10.90 million statistical bales, whereof just 3.00 million bales have so far been exported. Compared to last year shipments are lagging 2.45 million bales behind! The EWR report shows 3.05 million running bales ‘under shipping order’, but it looks like US logistics will remain slow for several more weeks.
When we look at the current US balance sheet, we have a total supply of around 21.5 million statistical bales (3.2 beginning stocks and 18.3 crop), of which so far just 3.0 million have been exported and another 1.0 million bales have been consumed by domestic mills. This leaves 17.5 million bales in existence that have yet to be put on a truck or boat to be processed by mills in the US and overseas.
Supply chain delays in other origins have led to a similar backlog in shipments, which means that there is a lot of cotton being held back that has yet to get through the system before it reaches retail stores. In other words, there is no shortage of cotton, it’s just not where it needs to be!
With West African origins expecting to produce 1.7 million bales more than last season and the Southern Hemisphere looking at 4.15 million bales more, there could be a supply glut by the middle of next year. Yes, consumer demand is still strong, but unless products hit the shelves in a timely manner to meet that demand, consumption is going to suffer.
This doesn’t mean that cotton prices will collapse, because between the large amount of unfixed on-call sales, China restocking its Reserve and speculators acting on inflation expectations, there should be enough support in the foreseeable future.
But what we are expecting is that the large inversion between current and new crop values will start to melt away over the coming months. There is simply no justification to have this kind of an inversion with all that supply on hand. Let’s not forget that in less than six months the December contract will take over as the reference month for pricing cotton.
So where do we go from here?
The market is trading in thin volume during the holiday period and this can lead to some volatile price moves. The chart has started to look more constructive over the last three sessions, but we need to see more volume and a jump in open interest before we can make a bullish case.
The last three weeks have shown that there is plenty of support on dips and maybe the market will try to work its way past the 50-day moving average at 109.92, which might open the way for another push into the previous 114-117 cents trading zone.
However, with all that backed up cotton we see it difficult for current crop futures to widen their inversion to December over the coming months. Either December will have to catch up by moving higher or current crop futures will have to pull back at some point.