CTZ22 – 94.62 – (+0.19)
CTH23 – 92.23 – (+0.28)
CTK23 – 90.84 – (+0.30)
CTN23 – 88.92 – (+0.30)
CTZ23 – 81.76 – (-0.07)
Zhengzhou CF301 – 13,665 – (-225)
Cotlook “A” Index – 113.25 (+0.95) – From the 3rd August 2022
Daily volume – 15,171
AWP – 104.48
Open interest – 188,086
Certificated stock – 4,552
Z22/H23 spread – (+2.29)
Z22/Z23 spread – (+12.86)
September Options Expiry – 19th August 2022
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– August has begun quietly with many traders either on, or soon to go on holiday and we can expect futures volume to dwindle in the days ahead.
– Indeed, it would be fair to say that the intraday range has already started to get smaller with the last 2 days seeing a range of less than 200 points intraday. If this continues then expect implied “at the money” volatility for Z22 options to go lower!
– What is more intriguing is the fact that the spread between Z22 and H23 has finally started to reduce, closing tonight at just 229 points and if prices eventually head South into Z22 expiry, as EAP expect, then one should also expect the spreads between Z22/H, K and N23 to also get much closer. A chart of the Z22/H23 spread is enclosed below!
– Take a good look at how this spread premium has started to implode in the last few days!
– This is exactly what happened in the 11/12 season so if we are right about the current season being a comparable one then one should know what to expect!
– The weekly CFTC Cotton “on call” report 30 showed that between current crop Z22, H, K and N23 there is a net 63,123 contracts to be fixed. Of this amount the majority (60%) is against the front month Z22 contract.
– The current net “unfixed “on call” position in Z22 is the highest ever for week 30 but the net “unfixed” position for the 22/23 season (i.e. Z22, H, K and N23) is certainly not!
– We were rightly reminded today by some insightful traders at a AAA1 merchant house, that many of the forward sales of new crop Cotton are being offered and SOLD by merchants against Z22 for shipments out to 1/2/3-23eq. Moreover, uncovered and short buyers simply have no choice but to buy on such terms!
– The reason for this is merchants realise the tightness of supply right now as well as the logistical problems (read delayed shipments) and continued high freights from many parts of the world.
– Consequently we have a much higher “unfixed” figure for Z22 and a lesser “unfixed” figure than normal for H, K and N23. Note how the December contract closed last week at a premium of 323 points over the H23 contract (i.e. merchants were getting 323 points higher than they would against H23). Normally any sales for 1/2/3-23 eq would be against the H23 contract.
– The weekly USA Export sales report as of July 28th 2022 was disappointing! Net sales reductions of 112,400 RB for 2021/2022 was a marketing-year low and details can be found by clicking on the link below
– In Australia, we hear that the current 2022 crop is no more than 50% ginned and some gins will be operational to as late as November, for a crop (that we are reliably informed) will be 5.5m Australian sized bales. This translates into 5.735m statistical bales (480 lbs).
– We believe 85% of the crop is already sold from farmer to merchant and can only guesstimate what merchants still have in their hands of this most reliable and well regarded growth which is available when most of the Northern hemisphere crops are not!
– Next year we can expect a similar or even larger Australian crop as water seems in plentiful supply!
Conclusion
Prices have held the recent 82.54 low and a counter trend bounce has occurred which could take prices as high as the low 100’s but is expected by EAP to fail. Potentially, a test of the 200 day moving average is possible fuelled by some courageous end user physical buying and/or a hurricane inspired series of events. However, EAP maintain our longer term viewpoint that a final move to the 70’s will eventually play out by next May and the 22/23 season will prove to be an inverted season.
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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