Market Report

Weekend Cotton Bullets – 08/05/2023

Cotton surges but remains within the near 3 month range!

Privilege is not in itself bad; what matters is what we do with privilege...what will the King and Queen do in their reign?

CTN23 83.90 (+2.14)
CTZ23 83.24 (+1.84)
CTH24 83.01 (+1.85)

Zhengzhou WQU23 – 15,855 (+235)

Cotlook “A” Index – 94.20 (+3.00)

Daily volume – 54,360
AWP – 70.82
Open interest – 178,046
Certificated stock – 75

N23/Z23 spread – (+0.66)
Z23/H24 spread – (+0.23)
H24/K24 – (+0.26)
K24/N24– (+0.36)

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

Introduction

– Cotton had a fairly wild week, nearly testing both the bottom and top of the approximate 10c/lb range we have been in since mid February (76.34 to 86.67). For the record, N23 traded in a 596 point range between 78.56 and 84.52 on good average daily futures volume of 33,593 contracts and about 10% higher than the previous week. Prices closed just above the middle (82.30) of the wider 15c/lb range of 75.00 to 89.59 range we have been in for the last 7 months!
– Whilst Cotton may have felt hard to predict, the moves have been what we told readers to expect in our weekend report of the 22nd April when we stated “This time of year has always been a highly volatile time of year, as Cotton rolls from old crop to new crop, with EAP expecting 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!”
– In short summary, we would like to state “We have not changed our viewpoint!” and note that the average intraday range for N23 last week was just 224 points and similar what it has been the last month!
– As always we have taken a considered look at the open interest in N23 options, as it gives an excellent insight as to where to expect this contract will expire in 41 days time, being a few days prior to N23 futures 1st notice day on the 26th June!
– It is a fact that 90c/lb is where most of the open calls lie and for puts it is at the 75 strike basis the N23 contract. A weighted average taking into account open interest in both calls and puts between 70 and 95 suggest fair value for the N23 as of Friday’s close is between 82 and 83c/lb (explanation for how this is calculated is available upon request!)

– The nearby July contract has some uncanny comparisons to the N12 contract of 11 years ago. Note that the 11/12 season was an inverse season just like 22/23 has been (i.e has been trending down all season since June), noting the 11/12 season followed the 10/11 season when we saw the highest prices ever seen for Cotton.
– We highlighted this point months ago and we think it well worthwhile to do so again.The 21/22 season saw the 2nd highest seasonal high recorded in a season this century!
– The chart of N12 traded sideways between circa 85 and 100c from mid September to early May (range of circa 15c/lb for 8 months) compared to 22/23 which has traded 75 to 90c/lb (range of 15c/lb since November for 7 months) so far!
– If there is ever a warning as to what may happen in the next 1 month then look no further than what happened in May 2012 against the N12 contract which literally dropped 15c/lb in a month as it broke out of its range into expiry. We all know history may not necessarily repeat but the conditions today, compared to back then have many similarities! (read position of funds, lacklustre demand and price action). The warning is made!

– New crop Z23 contract is interesting for the fact that last week’s price action has seen the contract close above the medium and longer term moving averages (50, 100 and 200 day on the below chart) noting that all of them are very close (81.13 to 82.36)
– We are reminded that the circa 28c/lb range so far seen over the last 12 months saw Z23 close just below the 50% level at 84.11 and 15% above the average price seen this century for this contract.
– The latter point is a fact and if rains in Texas materialise as we expect and demand is questionable the higher the market goes, then we are a very happy scale up seller from current levels of Z23 up to perhaps a spike to 92c/lb although we somehow doubt we will have any chance of seeing the 90’s!

– The CFTC COT report as of last Tuesday saw Managed Money (MM) as net sellers for the second week increasing their net short by 1,590 contracts to a net 21,888 contracts. Between MM, Other and Non Reportables (OR & NR) their overall net short is 6,690 contracts. This is substantially less than the MM position in the bigger brothers of Soy and Corn where they are much shorter and goes some way to explain why those commodities have been so weak in recent months as MM, OR and NR have got out of their longs!

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

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