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CTK23 82.18 (-0.44)
CTN23 82.89 (-0.36)
CTZ23 82.89 (-0.36)
Zhengzhou WQK23 – 14,620 (-30)
Cotlook “A” Index – 97.20 (-2.20) – 8th March
Daily volume – 28,446
AWP – 72.73
Open interest – 186,433
Certificated stock – 1,147
K23 / N23 spread – (-0.71)
N23 / Z23 spread – (-0.18)
May Options Expiry – 14th April 2023
May 1st Notice Day – 24th April 2023
– The cotton market continues its sideways crawl and even the previously seen intraday volatility seems to have deserted us of late. Since the 2nd November we have been in a range from 77.50 to 89.92 basis the front month, though even this has recently narrowed. We have not seen a close above 86 since 31st January, nor have we seen a close below 81 since 4th January!! This week has seen more of the same and the current front month, May ’23, closed today at 82.18.
– Federal Reserve Chair Powell appeared before Congress on Tuesday with some pretty hawkish comments. Powell suggested that the pace of interest rate hikes may need to be increased as recent data has showed the US economy is not cooling at the pace required, despite a year of monetary tightening measures.
– Brazil cotton exports for February came in disappointingly low at 43,000 MT which is the lowest monthly level since August 2018. This takes total exports for the MY to 1.119 MMT or 5.14 million bales, compared to the USDA estimate of 7.7 million bales, though we would maintain a higher number than this to prevent a build in ending stocks. At some point Brazil exports will need to pick up before new crop comes to market. With US cotton being aggressively priced, the effort to market the remaining Brazil cotton will have to come via reductions in the basis.
– The USDA released their March WASDE yesterday with no changes at all made to the USA balance sheet. Globally overall consumption for 2022/23 was cut by 550,000 bales with reductions of 300,000 bales for Turkey, 200,000 bales for Pakistan and 100,000 each for Bangladesh and Indonesia.
– On the production side a further decrease of 1 million bales for India was more than offset by the equivalent increase for China along with a ½ million bale increase in Australia (though this represents cotton yet to be harvested) and a 200,000 bale increase in Uzbekistan.
– The USDA made historical increases in Uzbek consumption going back to 2018/19, but seeing as it was only in the September WASDE that they made historical reductions in Uzbek consumption going back to 2018/19 one should perhaps not read too much into this!
– The more interesting historical reduction to consumption was a 1.25 million bale cut in China 2021/22 consumption which has the USDA, for once, actually below our own number for that season! After complaining repeatedly about USDA consumption numbers being too high, we are not going to now complain that they are too low!! One question we would have surrounds the sharp increase in USDA China consumption from 33.75 million bales in 2021/22 to 36 million bales in 2022/23. Given that the most restrictive of the lockdown measures were in place in the first half of this MY and that conditions are still only improving incrementally we believe that such a sharp increase in this season will prove to be premature.
– Whilst our historical Chinese ending stocks remain significantly lower than USDA, we do not argue with one outcome of this change: there is a lot of cotton in China right now!! This is the main reason for China prices being currently much closer to international prices than the historical norm. Despite the excitement around China’s reopening and recent export sales, this would suggest there is a limit as to the need for imports to meet any growing consumption in China in the near future.
– The USDA export sales report for the week ending 2nd March reported current crop net sales of 114,500 bales. The largest net buyer was Vietnam with 44,700 bales, but interestingly the second largest outright buyer was China with 31,100 bales which were then offset by 18,300 bales of cancellations. For new crop there were net reductions of 68,300 bales, owing to cancellations of 87,100 bales net for Pakistan. Exports were 287,500 bales which is around the average weekly shipments needed to reach the USDA target and is a source of encouragement in that regard.
– The CFTC cotton on call report based on positions as of 3rd March showed another week with little action as the market is perhaps leading to a feeling of complacency amongst the unfixed. Net on call sales for current crop increased 255 contracts for the week and now stand at 26,626 contracts. This remains the 11th highest number for this week of the year and the outright unfixed purchase position of 21,431 contracts remains the highest on record for this week of the year.
We believe value is to be had in the low 80’s basis K23 and EAP would be a scale down buyer of Cotton from this level down to the long standing gap in the mid 70’s dating back to November, were prices to reach there. Above, we maintain that prices in the high 80’s has Cotton fully valued, with any move in to the 90’s to be considered a selling opportunity. We maintain that an anticipated relatively wide trading range of 75 to 95c/lb is likely to prevail to the end of the season ending May 31st.
*Please note that we only share CFTC CTO on weekend reports.
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