- Jo Earlam
- April 9, 2023
- 9:55 am
- 10 min read
Brasilian basis heads South and should take everything else with it!
The British Open will be played at Hoylake for the 3rd time this century for the honour of playing for the famous "Claret Jug"
CTK23 83.20 (+2.13)
CTN23 83.47 (+2.18)
CTZ23 83.24 (+1.62)
Zhengzhou WQK23 – 14,590 (+190)
Cotlook “A” Index – 94.85 (unch)
Daily volume – 57,564
AWP – 67.84
Open interest – 192,156
Certificated stock – 1,485
K23 / N23 spread – (-0.27)
N23 / Z23 spread – (+0.23)
May Options Expiry – 14th April 2023
May 1st Notice Day – 24th April 2023
Introduction
– Cotton had a quieter and Good Friday holiday shortened week trading in a 342 point range between 80.22 and 83.64 before ending the week up 42 points on good trading volume averaging 41,483 futures daily. Monday will see the start of the GSCI roll period when funds roll from May into July and will last 5 consecutive days whereupon July will be the front month on account of being the month with the highest open interest.
– K23 option expiry is just 5 days away and nothing has happened to change the EAP viewpoint that K23 is likely to expire somewhere between 80 and 85c/lb next Friday where most of the bets will expire worthless. Funnily enough it is by and large the same story in the July options. Volatility in the high 20’s is in our opinion is going to go lower (i.e. price protection is going to cost less) if prices continue the sideways pattern. The average intraday range for K23 was just 206 points last week and 182 points for new crop Z23. This is heading to the more usual 5 year average of 148 points that had occurred before prices shot up back at the end of September 2021!
– For the month of March Brazil exported approximately 76,000 MT of cotton which has taken total exports for the season to just short of 1.2 MMT. USDA estimates for the season are for exports of 1.676 MMT, that is certainly achievable, but we would need imports to pick up above 100k MT a month and, at present, that is questionable.
– Reports from in country are that merchants are having to move cotton off the farm yard and find alternative storage. As well as being costly, this is not a long term solution, especially with a large new crop approaching. Brazil’s domestic consumption (650k mt) is nowhere near large enough to absorb this excess stock, meaning pressured sales will have to be found in the export market. This is only going to be achieved via a more aggressive Brazilian basis, which will hurt long and wrong merchants who need to clear their books. Carryover at the end of May could be as much as 600k mt with a weakening Brasilian basis that will likely send the basis for outside growths South as well!
– The final Pakistan crop has been reported as 4,912,069 local bales by the PCGA, down 34% on the previous year. This should imply solid mill demand from the country and we have seen good buying earlier in the season. However, the ongoing currency issues are making it almost impossible for mills to access the dollars needed to pay for imported cotton, which in turn is having the effect of eroding cotton consumption for the 22/23 season.
– US job openings for February fell to 9.9 million vacancies from 10.5 million in January, the first time since May 2021 that openings have fallen below 10 million and well below the Reuters forecast of 10.4 million vacancies.
– The US Non-farms payroll report showed jobs growth slowing with 236,000 positions added for March. Slowing from 326,000 in February and 472,000 in January as the Fed cooling measures kick in. However, this is not expected to be enough for the Fed to put off further rate rises at this stage.
– The USDA export sales report for the week ending 30th March dropped off from recent weeks perhaps in line with the rally from the nearby lows that came in the first half of the reporting period. Net sales of 160,500 bales were reported for current crop, once again led by China, with 64,400 bales, and Vietnam with 52,500 bales. Taken together with Pima sales this total took us over the USDA’s export prediction of 12 million bales for the season in terms of sales. The focus for reaching this number will now turn to shipments. After exports of 250,100 bales this week the total shipped now stands at 7.137 million bales.
– US ending stocks are currently estimated at 4.3 million bales and there is certainly room for some tightening before things get overly bullish. However, continuing strong sales would bring some upward pressure on the market before too long. Furthermore, whilst lagging shipments may mean we do not increase the actual export target by too much, once cotton is sold it is still out of the available supply, even if the actual shipment does not come until after 31st July.
– The CFTC cotton on call report based on positions as of 31st March continues to offer little in the way of influence. The overall current crop on call sales position stands at 16,169 contracts, which is the 15th highest, out of 23 on record, for this week of the year. The, soon to expire, May position is negative 762 contracts, whilst the July position is 16,913 contracts, a more than manageable position.
– The CFTC COT report as of last Tuesday showed Managed Money (MM) as active buyers reducing their net short to 17,274 contracts. Between MM, OR and NR their overall net short is 10,179 contracts.
Conclusion
Cotton had a good week and closed near to the top end of our anticipated range. We cannot rule out another attempt to fully fill the gap down to 74.85 and unfixed end users may choose to be scale down buyers of Cotton from the high 70’s, down to the low 70’s were prices to get there. For old crop only, we like the long side of the cotton market in the 70’s because funds are short and end users can make margins! 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. Have a great Easter weekend!
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
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.