PLEXUS Market Comments
MARKET COMMENTS – 20 January, 2022
NY futures rallied to new contract highs this week, with March gaining 603 points to close at 122.87 cents. The July/Dec inversion widened 140 points to 1786 points.
Trade short-covering in March and more spec buying in the back months continued to force values higher this week. Since posting a low of 104.27 cents exactly a month ago, the spot month has advanced over 18 cents and it is still anyone’s guess as to where this rocket will finally run out of fuel.
March open interest declined by 2.7k contracts to 108.4k contracts since last week as a result of short-covering, while overall open interest was up 2.6k contracts to 250.2k contracts on spec buying.
Today’s CFTC on-call report, which showed unfixed purchases and sales as of last Friday, January 14, continues to paint a rather bullish picture for the near term, since very little progress has been made to reduce the amount of unfixed current crop sales.
Unfixed sales on March still amounted to 4.73 million bales, with just about 3-4 weeks left to get these fixations squared away. Additionally, there were 2.35 million bales open on May and 5.07 million on July, for a total of 12.15 million bales in unfixed current crop sales. This provides a tremendous amount of buying power, especially if speculators are in no mood to sell.
By contrast, there were just 0.88 million bales in purchases open on March, 0.31 million on May and 0.55 million on July, for a total of 1.74 million bales in unfixed current crop purchases. Thus, the difference between current crop sales and purchases amounts to a strong 10.41 million bales in favor of sales.
India provided another bullish reason this week, as the Cotton Association of India (CAI) revised its crop estimate to 34.8 million local bales, while raising consumption to 34.5 million local bales, which means that the seasonal production surplus is basically gone.
Since beginning stocks are still overstated by the USDA, we doubt that India will be able to be a net exporter of 4.8 million statistical bales (6.14 million local bales). In the first four months of the marketing year, from August to November, India exported only 1.18 million statistical bales, while importing 0.23 million bales, which gives us net exports of just 0.95 million statistical bales.
As Indian prices have gone sky high, it is now more likely that India will turn into a stronger importer during the second half of the season. Only Bangladesh, which has bought 64% of India’s exports in the first four months of the marketing year, will probably continue to pay these high prices, since it has not much of a choice due to shipment delays from other origins.
The US (15 million bales), Brazil (8.3 million), West Africa (6.0 million), India (5.8 million) and Australia (4.0 million) make up 83 percent of global exports this season according to the USDA. If India falls away, it puts more burden on other origins to provide supplies to mills all over the globe.
As we have seen in recent months, shipments from the US and Brazil have been lagging considerably behind their normal pace, while West Africa is struggling to find vessels and Australia will only enter the picture in a bigger way by the middle of the year, since last year’s crop was relatively small.
US export sales are delayed until Friday, but we expect to see another disappointing shipment number, since the LA/Long Beach twin ports reported that around 10% of their workforce was out with Omicron last week. There were still 104 container ships backed up as of last Wednesday, with only 11 ships at anchor or loitering inside a 40-mile radius around the twin ports, while 93 were waiting outside the safety area.
This morning’s EWR report showed 3.7 million running bales ‘under shipping order’, which compares to 2.27 million bales a year ago and 2.16 million bales two years ago. While it’s easy to sell a bale, it’s another story to get it to its destination!
So where do we go from here?
Today’s on-call report is worrisome, since it showed that very little progress has been made with March fixations. This will most likely lead to further price spikes due to sell-side illiquidity, as trade shorts (mill fixations) still have to cover over four million bales in a matter of just 3-4 weeks.
After March is liquidated we will likely see a sharp pullback, similar to what we saw in November after the December contract was done. May has a much smaller amount of unfixed sales (2.35 million bales), so there won’t be as much buying pressure.
We are still in this ‘bird in hand worth two in the bush’ situation, with readily available cotton at destination fetching fantastic prices of currently around 140 cents. However, mills are not willing to pay these levels for deferred shipments yet and the market needs to figure out how to bridge this 17-18 cents gap between July and December, especially with all the massive shipment delays making forward pricing challenging.
We expect there to be a lot of quarrels between shippers and mills about what price to assign a delayed shipment and this will start to play into the July/December spread. We are still of the opinion that this inversion will flatten considerably as we head towards the middle of the year.