New York futures continued their precipitous slide, with December falling another 316 points this week to close at 61.89 cents/lb.
Negative technical and fundamental developments pushed December to a new record low of 60.83 cents on Thursday, before a dead-cat bounce resulted in a small rebound going into the weekend.
The technical picture looks emphatically bearish after the market broke through some key support points this week. First December dropped below an uptrend line dating back to August 1, which effectively ended an eight-week countertrend move, and then it swiftly moved back below the longer-term downtrend line that originated in early May. Adding insult to injury, December then took out the 62.02 cents low a few days later, which opened the door to some uncharted territory to the downside.
The latest CFTC spec/hedge report, which reflects position changes as of Tuesday, September 23, clearly shows that speculators were the driving force behind this latest selloff as they increased their net short by an impressive 12Ά100 contracts. The trade on the other hand was a net buyer of 12Ά861 contracts, while index funds made up the difference by selling 761 lots net. Speculators and the trade are now 2.4 million and 3.5 million bales net short, respectively, while index funds hold a corresponding net long of 5.9 million bales.
ChinaΆs forceful announcement this week that no import quota outside the 894Ά000 tons TRQ would be granted in 2015 also weighed on the market, since lower than expected imports would lead to an increase in the ROW balance sheet. Currently the USDA has China down for 8.0 million bales in imports this season and we still feel that this number remains within reach. The just released import data shows that China imported 0.94 million bales of raw cotton in August, which is a good first step towards that 8.0 million bales goal. If September to December imports were to continue on a similar or even slightly lower trajectory, then we would already be halfway there by yearΆs end.
Somewhat more concerning is the slowdown in the August yarn import data, which at 133Ά165 tons was considerably lower than the 180Ά955 tons a year earlier. Vietnam took over as the top shipper, while Pakistan and India were far below their usual amounts. For the first eight months of the calendar year yarn imports have amounted to 1.13 million tons so far, which is just 4% below last yearΆs total, but it is the declining trend that is worrisome. Fewer yarn imports by China will translate into higher ROW ending stocks and to us this presents an even bigger issue than cotton imports.
The marketΆs main price driver over the last three seasons has without doubt been the relationship between the ROW production surplus and Chinese imports. Since 2011/12 China has basically imported every bale the ROW produced in excess and this is finally coming to an end with ChinaΆs determination to reduce its massive stockpile.
The latest USDA report estimates the gap between the ROW surplus of 12.9 million bales and Chinese imports of 8.0 million bales to be at 4.9 million bales, but a combination of 1) a slightly larger ROW crop, 2) a small reduction in Chinese cotton imports and 3) a somewhat larger reduction in Chinese yarn imports could potentially lead to an increase in ROW stocks of as many as 7 or 8 million bales this season. In a year when global imports are expected to drop by 5.8 million bales, such an inventory increase would certainly be felt. Although the US (loan) and India (MSP) offer some support mechanisms, we still feel that this situation will eventually lead to additional price pressure next spring or at a minimum force full carrying charges between March, May and July in order to entice someone to hold these excess stocks.
So where do we go from here? In view of the bearish fundamentals going forward, especially after the turn of the year, it may seem somewhat surprising that the trade would be such a strong buyer in the futures market last week, buying 1.3 million bales net between September 17th and 23rd. Since about two-thirds of this buying consisted of new long positions, one possible explanation is that merchants buy futures in lieu of cash cotton, which at these low price levels is not abundantly available yet and that they will later on swap these futures out for cash.
The danger for the shorts, many of which consist of speculators, is that they are betting on a bearish long-term scenario that is still a long while from being realized. The nearby situation is still very tight, as growers are reluctant to sell their crop, which by the way is still mostly in the field and exposed to weather. West Texas saw another round of heavy rain this week and according to the long-range forecast this pattern is not going to change over the next month or two. In other words, large parts of the US crop are still an uncertainty at this point, especially in regards to quality. While we feel that this bear market has a lot further to go, we donΆt think that December is the appropriate month to be short in!
Regards
