- Jo Earlam
- June 30, 2022
- 9:47 pm
- 10 min read
Where does value lie?
Fortunate are those who take the first steps
CTZ22 98.84 (+1.36)
CTH22 94.78 (+1.38)
CTK22 92.47 (+1.45)
Zhengzhou CF209 – 18,369 (+360)
Cotlook “A” Index – 135.50 (-0.50) – 29th June
Daily volume – 34,195
AWP – 135.95
Open interest – 175,609
Certificated stock – 12,561
Dec / March spread – (+4.06)
September Options Expiry – 19th August 2022
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– Cotton has see-sawed in the 90’s this week finding a spike bottom at 91.20 before finding support in Tuesday’s trade and trading towards the high 90’s as the week has worn on. Volume has been high and overall open interest has declined as fund longs get out of losing positions.
– We think it would be fair to say that the desperate and “must get out at all costs” positions have been liquidated as end users equally find value in Z22 on the mid to low 90’s. Rumours of a big fund in trouble on their cotton position were rife early on in the week which contributed to the panic. The sheer scale of the fall had many merchants caught long and desperate to find protection at any cost.
– The protection cost to the downside has changed hugely in the last 10 days which put premium rocketing in cost as the market has dropped.
– Mills are, not surprisingly, pretty shaken by the events of recent days. When asking about the yarn market this week a good friend told us simply, “There isn’t one.” Elsewhere, mills are expecting some yarn buyers to “request” discounts on existing contracts in light of the market fall.
– Many mills are feeling the squeeze on severely delayed contracts, some of which should have shipped as early as the start of the year and have been fixed accordingly. Though the more reputable mills will grit their teeth and honour their obligations, there will be many a merchant sweating on the less reputable outfits and the number of ICA arbitrations, which stands at six so far this year, could rocket shortly!!
– With all the focus on the calamitous performance of ICE over the last couple of weeks we thought it would be a good idea to take a look at the performance of the two other prominent cotton futures markets, namely CZCE in China and MCX in India. The first chart below shows the performance of the three markets over the course of the month of June (with CZCE yarn thrown in for good measure), whilst the second chart shows the spread between ICE and the two overseas market over the same period.
– As can be seen, CZCE has followed ICE down, though not to the same extent, whilst MCX has largely obeyed its own local fundamentals and moved higher in spite of the losses in ICE. This would suggest that, once the recent volatility has settled down, we will see US cotton gaining value against growths in these countries.
– The USDA June prospective plantings report was released today estimating 12.5 million acres (of which 12.3 million bales is upland). This is compared to 12.2 million acres in the March report (12.1 million acres for upland). Upland planting acreage is estimated 11% higher year on year, though the drought in Texas means abandonment will be remarkably high.
– The USDA export pendulum swung back the other way this week with a total of only 94,400 bales sold across both crop years. Current crop net sales were 48,100 bales whilst new crop reported 46,300 bales. Exports continue to lag the pace required with 364,400 bales shipped and, we maintain that the USDA will need to lower the 2021/22 US export number.
– CFTC cotton on call report, based positions on 24th June showed the highest ever Dec’ position for this week of the year at 38,370 contracts. However, the overall crop year position ranks only third and at 61,833 contracts is way short of the mammoth 100,915 contracts recorded in week 25 2018!
Conclusion
We think the market has found a short term bottom at 91.20 and indeed feel that if retested 88 to 89c/lb will also be strong support. Above the market we see stiff resistance in the early 100’s up to 110c/lb and were we to see a rally into this area then we would expect the bear to reassert itself. EAP maintain our viewpoint this will be an inverse season and we have already seen the seasonal high at 133.79c/lb on the 17th May and it would not surprise us to see a move to the mid 70’s sometime in the late 1st quarter of 2023 before this bear market is over.
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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