Cotton futures gapped higher to begin the week, driven by positive developments between the US and China regarding the trade dispute.  Again, the US is the world’s largest exporter of cotton and China is the world’s largest importer.   The lead March19 contract pushed up against limit (+3.00) before softening.  Prices ended the session on the daily lows, but still with respectable gains.  The softer market late in the session came along side growing skepticism regarding the trade war advancements.  Initial optimism from both sides is already being watered down with the reality that no tariffs have yet been removed and nothing was signed.

I lean towards the optimistic side, hoping that both Trump and Xi have the fresh taste of economic dung in their mouths and will move forward with negotiations with a renewed sense of purpose.  While existing tariffs may be problematic for the few, a trade war is bad for all.  President Xi mentioned agricultural products being a big beneficiary of the purchases by China and that means soybeans and cotton.  The Chinese strategic cotton reserve is now down to modest levels and likely very low on higher grades of cotton.   China still needs to import bales to the mills of the East.  Cotton produced in Xinjiang eases out as a snails pace, while yarn production in the province continues to grow.  Although the US is low on high grades of cotton this year, it is still the only place the Chinese can source large volumes of lint consistently.

Within the cotton market, physical trade was reported quiet over the weekend, and rightly so as traders awaited any developments at the dinner in Buenos Aires.  I have heard that mill fixations were moved closer to the market after the higher open.  Likewise, its very likely that today’s rally was met with a host merchant selling as producers sold and fixed on-call sales.

Trading volume on the ICE #2 contract reached almost 46,000 contracts, a heavy day by most measures.  The heavy trading volume lends validity to the price gap left today, leading me to believe that it could be a “breakaway gap.”    These gaps come after significant basing patterns, not unlike the one seen since early October.

by Andy Ryan

BNA Commodities LLC

andy.ryan@bnacommodities.com