New York futures moved higher this week, as December gained 125 points to close at 65.92 cents.
After December had traded in a 200-point range for twelve straight sessions, it finally broke out to the upside on Wednesday on what appeared to be spec short covering. It did so on expanding volume and rising open interest, which is constructive, with todayΆs close marking the highest level in four weeks.
After it became evident over the last couple of weeks that speculators were no longer forcing the market lower and growers were not ready to part with their crops in the low 60s, it was just a matter of time until the downside momentum was going to roll over. With the market trading sideways for the last three weeks, moving averages caught up to the lower price level and when December reached above its 21-day moving average and recent highs on Wednesday, some buy stops were triggered.
The increase in December open interest seems to indicate that spec shorts got out, while the trade used the opportunity to increase its short hedge position. As we have stated repeatedly, growers are considerably behind in selling or hedging their crops compared to previous seasons, with the latest CFTC report as of August 12 showing the trade just 3.4 million bales net short, compared to 16.0 million bales a year ago.
Other than this technical bounce there was relatively little news this week, as the market continues to await details of ChinaΆs new cotton policy. With reserve sales ending at the end of this month, we should get an announcement any day now. Our worry is that the market has already discounted an overly bearish Chinese scenario and if subsidies were to fall short of expectations, we could see a bullish reaction in China, which in turn would translate into firmer international prices.
Over the last three seasons the market has continuously underestimated Chinese imports. Just take the just ended 2013/14-season for example, for which the USDA estimated Chinese imports at 11.0 million as recently as March, before gradually increasing the number to 13.6 million bales in its most recent report. As it turns out, even that was not enough, since China imported 1.29 million bales in July, bringing the seasonal total for 2013/14 to 14.12 million bales, or 0.52 million bales more than the current USDA estimate. This will most likely result in another downward revision of already tight ROW beginning stocks.
When we compare the seasonal surplus in the ROW with Chinese imports over the last three seasons, we find that China has absorbed all excess cotton from the rest of the world. Here are the numbers: In 2011/12, the ROW produced a surplus of 27.52 million bales, of which China imported 24.53 million bales. In 2012/13, the ROW surplus amounted to 17.18 million bales, while China imported 20.33 million bales. In other words, China took all the excess cotton plus over 3 million bales of inventory.
The same happened in the just ended 2013/14-season, when the ROW produced a surplus of 12.35 million bales, but China imported 14.12 million bales, once again absorbing all excess cotton plus nearly 2 million bales of inventory. Prices have recently collapsed in the belief that Chinese imports will finally slow down to a trickle, allowing ROW inventories to grow. The current USDA numbers foresee a ROW surplus of 12.04 million bales, with Chinese imports at just 8.0 million bales. Only time will tell whether the market has finally got it right!
Looking at the latest US export sales report, which registered 158Ά200 running bales in net new sales, we notice that China was the most active buyer with 69Ά500 running bales, followed by Turkey and Indonesia. In total there were 18 different markets interested in US cotton. As we have stated before, we feel that it is primarily a lack of attractive offers rather than a lack of buying interest that keeps sales below expectations at the moment and this situation is not likely to change until more cotton enters the marketing channels. Total commitments for the season already amount to 4.9 million statistical bales, of which 0.9 million belong to China.
So where do we go from here? Technically the market looks poised to move higher in the near-term. YesterdayΆs up move was the marketΆs strongest showing since early May and with speculators and other-reportable and non-reportable traders sitting on 6.8 million bales in outright shorts, there is some fuel for a rally. The question is how aggressive will trade selling get as the market tries to move higher? Our best guess is that selling pressure will intensify from about 67/68 cents onwards. From a fundamental point of view the marketΆs strength makes sense at the moment, because cash cotton for nearby shipment has been hard to come by and higher prices are therefore needed to flush some supplies into the marketing channels. However, barring any crop problems, we treat this as a countertrend rally and assume that bearish forces will return once the bottleneck situation has been resolved.
Best regards
