CTZ22 108.21 (-5.00)
CTH23 105.14 (-5.00)
CTK23 102.37 (-5.00)
Zhengzhou CF301 – 14,970 (+40)
Cotlook “A” Index – 130.60 (-4.65) – 31st August
Daily volume – 27,560
AWP – 104.48
Open interest – 212,337
Certificated stock – 4,552
Z22 / H23 spread – (+3.07)
Z22 / Z23 spread – (+24.10)
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– In the weekend report we talked about the macro outlook and in particular the Fed comments at Jackson Hole. The macros have weighed heavily on the equities markets this week (see chart of the S&P 500 below). Cotton has been by no means immune to these influences and has seemed under pressure all week before capitulating today with a limit down move, closing at 108.21 usc/lb basis the Dec ’22 contract, 947 points below Friday’s close and filling the chart gap that lay between 108.59 and 111.53.
– With China currently spinning the cheapest cotton in the world those markets that rely heavily on Chinese yarn imports are hurting. Vietnam is perhaps suffering the worst of this with none of the mills running at capacity. Capacity usage runs from 75% all the way down to mills who have suspended operations. Unless the price spread between Chinese and international cotton prices changes, we can only see further downside for Vietnamese consumption.
– The Pakistan crop production was estimated to be 8 million bales (170kg bale) prior to the flooding. However, now it is estimated that more than 2 million acres of crops have been impacted. The output from Sindh and Balochistan provinces which account for around 30-35% of overall production will be negligible. The crops in these provinces are completely unsalvageable.
– Overall production is now estimated to be a maximum of 6.0 million bales though potentially a lot less. The sole reliance on the Punjab province coupled with the heavy rains forecast in September is causing even greater concerns. It will likely take another week or two before a completely reliable estimate of the crop can be made.
– Consumption has also been impacted by the flooding as gins and spinning mills are closed. However, there are also rising energy costs and reduced working capital restrictions as cotton prices have climbed and interest rates have soared to 15% from 8% in the last year. Mills that have expanded capacity are limited on capital as central banks reduce liquidity and regional banks tighten credit lines. Estimates on the ground suggest that consumption is likely between 12-13 million bales (170kg bale) assuming the same carry in and out.
– After last week’s shambles the USDA has suspended the export sales report until 15th September when it will return based on the legacy system.
– The CFTC cotton on call report, based positions on 26th August showed an increase in the overall net on call sales position of 2,401 contracts to 65,978 contracts. This is the 5th highest position for this week of the year. The increase came in H23, K23 and N23, with a small decrease in the Z22 position. However, as we discussed in last week’s report, the position remains heavily skewed to the Dec.
Conclusion
The market has shown its hand this week as we expected it would. EAP believe that any rallies in the Cotton market, in the event we get them, should be sold. It now seems unlikely Z22 will reach the 120’s again and suggest a scale up selling policy would be wise should we see any sort of bounce in the days and weeks ahead. Longer term, EAP remain of the belief that the 22/23 season will prove to be an inverted one, with the final low at the end of the season and scale up selling into strength over the next 4/5 weeks will likely prove to be prudent.
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Chris Williams
Copyright statement
No image or information display on this site may be reproduced, transmitted or copied (other than for the purposes of fair dealing, as defined in the Copyright Act 1968) without the express written permission of Earlam & Partners Ltd. Contravention is an infrigement of Copyright Act and its amendments and may be subject to legal action.
Disclaimer
The risk of loss associated with futures and options trading can be substantial. Opinions set forth herein should not be viewed as an offer or solicitation to buy, sell or otherwise trade futures, options or securities. All opinions and information contained in this email constitute EAP’s judgment as of the date of this document and are subject to change without notice. EAP and their respective directors and employees may effect or have effected a transaction for their own account in the investments referred to in the material contained herein before or after the material is published to any customer of a Group Company or may give advice to customers which may differ from or be inconsistent with the information and opinions contained herein. While the information contained herein was obtained from sources believed to be reliable, no Group Company accepts any liability whatsoever for any loss arising from any inaccuracy herein or from any use of this document or its contents. This document may not be reproduced, distributed or published in electronic, paper or other form for any purpose without the prior written consent of EAP. This email has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. For the customers of EAP, this email is produced exclusively for our business and expert clients, it is not for general distribution and our services are not available to private clients. Past performance is not indicative of future results.