- Jo Earlam
- June 10, 2022
- 9:05 am
- 10 min read
Consumption under pressure from falling demand and MMF prices
The simple things are also the most extraordinary things, and only the wise can see them. – Paulo Coelho
CTN22 146.51 (+5.89)
CTZ22 124.93 (+2.39)
CTH22 120.11 (+2.37)
Zhengzhou CF209 – 20,400 (+95)
Cotlook “A” Index – 155.35 (-0.75) – 8th June
Daily volume – 40,670
AWP – 135.36
Open interest – 211,849
Certificated stock – 1,087
July / Dec spread – (+21.58)
Dec / March spread – (+4.82)
July Options Expiry – 10th June 2022
July 1st Notice Day – 24th June 2022
September Options Expiry – 19th August 2022
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– The front month Dec ’22 has enjoyed a strong week so far, closing today at 124.93 up 239 points on the day and 464 points above Friday’s close. Some of this strength may be attributed to disappointment in last week’s Texas rains, or perhaps to yesterday’s news out of India (below). However, more likely, in a very quiet week, it is has simply been pulled higher by the chronological front month July ’22 which is in a period of extreme volatility with options expiring tomorrow, the Goldman Roll on going and a large unfixed mill position still to be addressed.
– As noted in previous reports the July on call position has dropped a place to the second highest ever for this point of the season, behind the 17/18 season at which point the net N18 position stood at 31,769 contracts compared to 26,698 contracts in N22 today. Below are the charts of N17 (left) compared to N22 to date (right).
– India yesterday announced an increase in the minimum support price for seed cotton from Rps. 5,726 per quintal to Rps. 6,080 per quintal, or an increase of 6%. Given cotton prices have been well above the MSP level all season long, this should have little material impact at current prices.
– Yarn pricing and consumption seems to be coming under incredible pressure in recent weeks. In India we are hearing reports of 20% cuts in production from recent levels, whilst we are also hearing of some switching to MMF. In Pakistan much switching to MMF is also taking place, along with reductions in consumption as yarn stocks build. In the Far East we hear reports of retailers delaying orders, whilst polyester is offered not far above 60 usc/lb.
– China continues to offer cotton ex-consignment port to alternative destinations. Meanwhile, we hear of Chinese mills offering to resell existing contracts for Aug / Sep shipment to overseas buyers. Whilst the headlines have focused upon easing of lockdowns in Shanghai, and the direction of travel is certainly positive, there remain approximately 74 million people in China still under full or partial lockdown according to research from Japanese bank Nomura.
– Heavy rains in New South Wales, Australia has led to two-month delays for harvest as pickers are unable to get into the fields. The heavy rain has caused substantial degradations on colour and quality in major growing areas. For the 2022 crop, we are expecting a significant increase in discounted 41Cg and four leaf as a result. Overall production estimates range from 5.3 – 5.5 million bales.
– Here we go again, in a week where China continued to offer cotton ex-consignment stocks to Vietnam and Vietnam continued to not buy it, US export sales for 2021/22 crop totalled 259,200 bales with China accounting for 114,500 bales and Vietnam for 104,600 bales. Furthermore, given the report was for the week ending 2nd June, standard merchant terms would require an L/C to be opened by 15th June and a merchant would not issue load out instructions to a warehouse until the L/C was in hand and operable. This best case scenario would leave 45 days for the warehouse to book the cotton out (at a time when they should be inundated given the imbalance between reported sales and reported shipments for the year to date) and get the cotton on a boat before the 2021/22 marketing year ends. This would suggest that, even if these “sales” were actually made in the week ending 2nd June, contracting and reporting 259,200 bales for shipment in the 2021/22 crop year is at best delusional.
– Shipments were reported at 335,900 bales and, with 8 weeks remaining of the season, we remain well off the pace required to meet the USDA target of 14.75 million bales of exports. It would seem logical that this number is cut in tomorrow’s WASDE with 2022/23 exports increased accordingly.
Conclusion
We maintain that involvement in N22 is something to avoid if possible, but for new crop December we maintain this contract is very fully valued above 125c/lb and the recent spike in N22 offered a golden opportunity to lock in a good proportion of new crop sales 25c/lb higher than one could get just 6 weeks ago. Any bounces in Z22 to 122c/lb up to 130c/lb were we to get them, should be sold in our humble opinion.
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Written by:
Jo Earlam
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