NY futures managed to recover some of last week’s heavy losses, as December gained 293 points this week to close at 102.22 cents.
Although the market felt heavy for most of the week due to continued macroeconomic worries, today’s stronger than expected US export sales report and Germany’s approval of a bigger European bailout fund sent sellers to the sidelines, allowing for a modest recovery.
Against the backdrop of support by the Chinese Reserve, traders and mills in China used the recent break in prices to book a sizeable amount of US, Australian and Indian cotton. The US export sales report of this morning showed net sales of 222’700 running bales, of which China took 199’700 running bales. Turkey was also a strong buyer, contracting 36’200 bales, while Bangladesh cancelled an additional 21’100 bales net. Shipments of 82’600 running bales continued to lag, as old crop stocks remain scarce and new crop is just starting to move in.
Speaking of new crop, as of September 22 there have been 1.22 million bales classed so far, the majority of which consists of cotton from South Texas (1.07 million) and Louisiana (0.10 million). So far the quality outturn is not encouraging, since 48.9% of the cotton from South Texas is 1.1/32 or shorter, while in Louisiana it is 30%. Although micronaire is no issue in South Texas, averaging 4.5, it is on the high side in Louisiana at 5.0. It is evident from these fiber characteristics that the crops were under stress this summer and there will probably be more of this deficient cotton, especially in West Texas, Georgia and Alabama.
The mixed quality of these first 1.22 million bales is resulting in lower tenderability, since only 56.1 percent pass the requirements for certified cotton.
However, while some traders feel that a smaller percentage of tenderable cotton is bullish, we don’t necessarily agree, because after certified stock got cleaned out by last season’s bull market, it may once again become the dumping ground for odd qualities this season.
When we look at the composition of the 29’145 bales that were in the certified stock on September 26, we notice that 44% were of 1.1/32 staple, while 34% were 1.1/16 and just 22% measured 1.3/32 or longer. Once the West Texas crop moves in, additional short staple cotton is likely to hit the board, especially if NY futures remain relatively high compared to foreign growths. In order to find a taker for this cotton in an inverted market is not going to be an easy task, especially since a fast harvest reduces the odds for a short squeeze.
Today the lower house of parliament in Germany voted for a beefed up version of the EFSF (European Financial Stability Facility), a TARP-like version designed to buy bonds in secondary markets, enabling bank recapitalizations and offering precautionary credit lines. In short, Europe is trying the same model as the US by using more debt to combat an escalating debt problem. Markets reacted with some relief to the news, because this latest money-printing scheme seems potent enough to postpone any immediate sovereign debt or banking crisis. Although the printing of money is bullish for commodity prices in the longer term, the fact the it is Euros that are getting printed in large numbers may temporarily lead to a strengthening of the US dollar and thereby weigh against commodities.
So where do we go from here? There is currently no compelling reason to expect the market to break out of its sideways trend, which is defined between 93.20 and 115.47 cents. The “Chinese Put” (Chinese Reserve buying) seems to be in place for now and glancing at the latest CFTC figures, we notice that the trade has bought over 10’000 contracts net last week, suggesting that traders find value in prices below a dollar.
At the same time we cannot get too excited about the upside either, because Northern Hemisphere crops are moving in fast and mills are in no hurry to chase after cotton other than filling immediate needs, especially with yarn prices tapering off. Also, with the certified stock likely to become littered with short-staple cotton over the coming months, we should see a strengthening of the basis for premium grades. The way this may play out is by NY futures moving towards the lower end of their sideways range, while premium grades remain near current levels or move slightly higher.
Best Regards
