PLEXUS Market Comments
Posted : January 25, 2022

PLEXUS Market Comments


March continued to rally and posted a higher low for a 7th consecutive session. Volume was still moderate at 24k in futures, but was more active in options at 8.9k contracts (5.6k calls vs. 3.3k puts).

Open interest finally showed a bigger jump during yesterday’s rally, up 2.8k to 237.6k contracts. This tells us that it is not longer just trade short-covering forcing prices higher, but we now have new spec buying helping the bulls as well. 

Chinese futures continued to push higher, up 140 yuan/ton in the general session and another 250 yuan/ton in the US arb session, for a final price of 20,585 yuan/ton (=146.50 cents).

US export sales of 223,700 running bales were decent considering that we were in Christmas week, with 17 markets buying and 21 destinations receiving shipments of just 169,200 running bales. 

Total commitments are at 11.1 million statistical bales, which compares to 12.25 million a year ago. Shipments continue to fall behind at just 3.15 million bales, which compares to 5.75 million statistical bales a year ago. We now need to ship over 380k bales a week for the remaining 31 weeks of the marketing year to make the USDA estimate of 15.5 million bales. This is not likely to happen, especially with the current wave of COVID (over 500k cases a day) paralysing the country. 

There are over 3.4 million running bales under shipment order at the moment, but we simply don’t have the capacity to get these bales out at the usual speed. This leads me to believe that we end up with quite a few more ending stocks next summer, which should help to close the inversion between July and December. However, this could take a while to materialise, because we still have a lot of unfixed cotton in the front, which keeps forcing spot prices higher. 

Today’s on-call report showed that there are still over 12 million bales to fix in current crop. With all the shipment delays this will likely turn into a mess, because many customers will not be willing to pay for the inversion in the market if they don’t get their cotton on time. 

March closed today at 114.34 cents and it is now firmly back in the 113-117 range it occupied in November. As a reminder, the highest close in March has been 116.92 cents on November 17, with an intra-day high of 118.50 cents. With speculators now apparently joining this bullish party, there exists once again a lack of selling, as the trade still has to get out of a lot of shorts (over 5 million bales in unfixed March sales alone) over the coming six weeks. March could therefore take on a life of its own and pull this inverted board wider apart, although I still fail to see how this inversion will be able to persist as we move deeper into 2022. 

There is no shortage of cotton in the US, but mills have dug themselves into a hole with their 12 million bales in unfixed sales between March and July. This could lead to a potentially volatile and irrational market over the coming months. 

The market is gaining steam as open interest finally validates the move, which means that there is now some momentum that could push values to new highs! However, we will get a better idea next week when absent traders will return from the holiday break.

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