NY futures had a mixed performance this week, as May gave up 472 points to close at 200.98 cents, while December gained 200 points to close at 128.80 cents.
After the May contract had rallied from a low of 175.13 cents on February 25 to a synthetic intra-day high of 226.69 cents on March 7, a parabolic move of over 50 cents in just seven sessions, the momentum has once again turned negative over the past few sessions as profit taking and rumors about cancellations of US cotton managed to cap the recent advance.
The spread between current and new crop has gone through some remarkable swings over the past two weeks, with the May/Dec spread first expanding by nearly 40 cents to trade at over a dollar on March 7, only to collapse by nearly 30 cents since then.
May and July futures seem to be torn between two scenarios at the moment. On the one hand there is this still relatively large trade net short position, mainly stemming from unfixed on-call sales that as of last Friday amounted to 2.1 million bales in May and 3.6 million bales in July. In other words, there has been very little progress made on the fixation front and this procrastination by buyers continues to provide a decent amount of scale-down support.
On the other hand we have a record inversion between current and new crop, which incentivizes mills to stretch their supplies as thin as possible in an effort to safe them into a much cheaper future. There has been some talk of cancellations recently, although it is difficult to gauge what kind of volume may be involved. Judging by the latest US export sales report, which came in at 88’200 running bales net for the current marketing year and 398’300 running bales for shipment August onwards, there seems to be still plenty of demand for readily available cotton.
There were cancellations in several markets totaling 45’300 running bales, with the bulk coming from China, where domestic prices are currently cheaper than imports. However, merchants may welcome the opportunity to buy back some US cotton since it will allow them to rebuild the certified stock in order to regain some control over May and July. The certified stock has about doubled over the last two months and now measures around 230’000 bales, including bales under review. While that isn’t much by historical standards, a growing certified stock will likely deter some longs from becoming too aggressive. With still 5.7 million bales in fixations outstanding, it is certainly in the best interest of merchants to keep the market from running up another dollar from here.
If mills succeed in running their inventories down to bare bones in order to minimize paying current prices, they will have to be all the more aggressive in getting their hands on new crop supplies once they become available. This may not be easy, even if next year’s production turns out to be a record. Export commitments for next marketing year are already at 4.2 million statistical bales and they will certainly rise further over the coming months. Combine that with what domestic mills require and it is quite likely that total commitments will amount to around 10 million bales by the time harvest gains momentum. Unless mills have their delivery slot secured, they could find themselves in a mad scramble for cotton later this year. The December contract may therefore be subject to the same dynamics we have seen this season and any crop pressure will probably not be felt until March 12 and later deliveries. In other words, it is possible that the current inversion between December and its subsequent months will grow even bigger.
So where do we go from here? Although May and July bulls appear to be wounded, they remain very dangerous and could charge again at any moment. There are still plenty of shorts left that need to cover and until we see a sizable reduction in current crop open interest and unfixed on-call sales, the front months have enough fuel left for another explosion. However, with cash prices apparently topping out and with the certified stock growing, resistance is definitely getting stronger. Since support underneath the market is also seen as quite robust, we may therefore enter a more two-sided trading environment over the coming weeks, which would probably put some pressure on these currently very high volatility readings.
Best Regards
