Market Report

Thursday Cotton Bullets – 11/05/2023

Weather dominates as we head to new crop and May WASDE out tomorrow!

CTN23 79.62 (-1.14)
CTZ23 79.60 (-1.16)
CTH24 79.75 (-1.06)

Zhengzhou WQU23 – 15,645 (-50)

Cotlook “A” Index – 93.45 (-2.25) – from the 10th May

Daily volume – 30,735
AWP – 66.69
Open interest – 177,440
Certificated stock – 75

N23/Z23 spread – (+0.02)
Z23/H24 spread – (+0.15)
H24/K24 – (+0.11)
K24/N24– (+0.06)

July Options Expiry – 9th June 2023
July 1st Notice Day – 26th June 2023

Introduction

– CTN23 went to as high as 84.87 on Monday before heading lower and reaching as low as 79.56 in today’s trade. This was despite a robust USA export sales report but CTN23 still closed near the lows!
– Open interest in Z23 continues to gain over N23 with the difference in bets between the two less than 16k contracts. At this rate Z23 will likely be the month with the highest open interest, long before season’s end at the end of May!
– The weekly USA Export sales report was another good one at 246,800Rb and highlighted pictorially by our friends at IAG detailed below, for which we are much appreciative. China, Vietnam and Bangladesh lead the list of export destinations!
– Perhaps the most interesting point to make about the USA Export sales is that next year’s sales (i.e. 23/24) are 1.496mb versus 3.030 last year, being less than half the figure at the same period last year, when it would be fair to say the world outlook was rather more positive than today!

– Backing up the aforementioned point, ASOS PLC share price dropped 23% on Wednesday after disappointing sales news and reached a new low of 445p. A sharp decline in sales is the driver for its falling share price. The cost of living crisis impacting UK, EU and U.S. with declines of 10%, 7% and 12% revenues respectively!
– Most textile companies have been hammered in the last 12 months with many trading at or near 52 week lows….we do not see this friendly to Cotton prices!
– ASOS PLC (ASC.LN) Share Price – ASOS PLC share price dropped 23% on Wednesday after disappointing sales news. The stock has hit new lows as sales remain sluggish in the current macro environment.

– The CFTC “Cotton on Call” report as of Week 18 show that the difference between “on call sales” and “on call purchases” for the month of July is 13,181 contracts, in favour of sales and a change of just 735 contracts week on week. We repeat previous comments that we see this of little influence to prices into July futures expiry!
– News of more and more of rains in West Texas, especially over the weekend and the next 3 weeks until Memorial Day are crucial to the outcome of the USA crop. Latest precipitation models show the formation of monsoon-like conditions coming across Southwest Texas. The model below shows the Precipitation Probability outlook which is valid for the period between 16th May – 20th May 2023. The rains will support drought stricken regions of this key producing state but will need to head North (read Lubbock) to quell the drought mongers! (see map below of Texas)

– U.S. Drought monitor & Precipitation Outlook – The model below shows the Precipitation Probability outlook which is valid for the period between 16th May – 20th May 2023. The rains will support drought stricken regions of this key producing state.

– Domestic prices in Brazil versus NY prices have rapidly diverged since the start of the 22/23 season. In fact, the spread has gone from US$ 0.59 per pound to a negative US$ 0.7 cents per pound (as seen in the graph below). CEPEA closed down 13% to 79.73 cents per pound in April, and May is currently down 6%. Meanwhile, December 23 FOB basis have rebounded to levels seen previously in early 2022, at 400 ON for 31.4-36. With the steep decrease in domestic prices, it’s possible that Brazilian basis has found support at current levels.
– The decrease in fertiliser prices has contributed to a reduction in the cost of production, but the weakening of the dollar in relation to the real has created a new factor that producers must consider when selling. Compared to the same period last year, cotton seed prices have fallen by 26%. With the imminent arrival of the safrinha crop, merchants and producers must prepare their warehouses for its arrival and make space available as soon as next month in Bahia.
– In India, a CAI Crop Committee meeting was held on the 10th of May with around 25 of its members in attendance. During the Commitee meeting the 2022/23 crop was reduced by 4.65 lakh bales from 303.00 to 298.35 lakh bales (170 kg). The crop size has been reduced due to late arrivals but EAP will be commenting on this more in the weekend report as there may be more to this than meets the eye!
– If prices do a repeat of what EAP suggested they might do in the weekend report (i.e. head South fast) then it is quite possible the Brasil basis may well not get much cheaper. There will come a point that sellers are not willing to discount the basis any further.
– For instance, if NY prices dropped a further 10c in quick succession then the physical selling price would lose the longs too much money and they would just raise the basis. We have seen this before and uncovered end users might be better to take advantage of the cheapest Brasil basis in years NOW whilst they have the chance, rather than wait and find that the potential drop in NY does not translate to an equal drop in the physical price!

Conclusion

EAP cannot rule out N23 making another attempt to fully fill the gap down to 74.85 and unfixed end users may choose to be scale down buyers of this contract from the high 70’s, down to the low 70’s were prices to get there. EAP expect a 75c to 85c/lb trading range to the end of the season ending 31st May with any moves outside of this range expected to be extremely short lived. For new crop, we would consider a scale down long from the mid 70’s only!

Useful links

*Please note that we only share CFTC CTO on weekend reports. 

Written by:

Jo Earlam

Jo Earlam

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.