- Jo Earlam
- June 11, 2023
- 10:03 am
- 10 min read
Curious consumption from the USDA
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CTN23 84.04(-0.27)
CTZ23 81.82 (+0.19)
CTH24 81.61 (+0.15)
CTK24 81.52 (+0.23)
CTN24 81.29 (+0.28)
Zhengzhou WQU23 – 16,835 (+70)
Cotlook “A” Index – 93.15 (-0.70)
Daily volume – 46,686
AWP – 69.38
Open interest – 183,411
Certificated stock – 16,132
N23 / Z23 spread – (2.22)
Z23/H24 spread – (0.21)
H24/K24 spread – (0.09)
K24/N24 spread – (0.23)
July Options Expiry – 9th June 2023
July 1st Notice Day – 26th June 2023
December Options Expiry – 10th November 2023
December 1st Notice Day – 24th November 2023
Introduction
– July cotton traded the week in a 319 point range between 83.77 and 86.96 before finishing the week 201 points lower at 84.04. Friday was the 2nd day of the GSCI roll and open interest in this contract is dwindling fast at under 40k contracts versus new crop Z23 at over 107k contracts.
– The latter contract had a very quiet week trading between 80.86 and 82.45 being a range of just 159 points, before closing the week down just 3 points at 81.82. Volume, in view the roll period, was understandably good at 56,104 contracts daily, whilst in options, call buying slightly outnumbered puts with volume lower than last week at 8,563 contracts daily but nonetheless quite healthy!
– The spread between N23 and Z23 reached as high as 466 points N over Z this week but closed near its lows at 222 points. Those buyers with an option to roll into December are being given a second chance to do so for a much lower cost noting there are only ten days until July 1st notice day when any positions against old crop will need to be fixed or rolled!
– The USDA released the June WASDE on Friday which proved to be a mixture of the unsurprising and the incredulous. The US crop was increased to 16.5 million bales. Whilst there are many in the market calling for 17 million plus, and we would believe this to be true, the USDA traditionally taken an incremental approach so we should not be surprised that they have not taken the whole jump in one go. On the incredulous side the USDA have increased world consumption. Those who work for the USDA are probably a lot smarter than us, and we appreciate that they derive consumption from some very sophisticated macro analysis, whilst we “talk to our mates”. Having said that, we’ve got a lot of mates, in a lot of markets and we are yet to speak to anyone who believes that consumption is doing anything but reducing!
– In an interesting development certificated stock has been building over the course of the week reaching 16,132 bales. In the grand sweep of things16,132 bales is an insignificant number and only represents 161 contracts. However, we have to go back to last July to see a higher number, and then only for a brief period during the N23 delivery period – i.e. post-FND! Is someone trying to spook anyone left holding a long perhaps?
– Following the re-election of President Erdogan and the appointment of what seems to be the bones of a more rational economic team, there is a belief in the markets that the Turkish government will no longer look to support the Lira and allow the market to determine its true value. The below chart shows a first spike following the first round of the elections, with further sharp, post-victory, spikes as this became more apparent.
– The onset of the Indian monsoon has been, so far, delayed, as can be seen below. Farmers have begun sowing in some areas following some pre-monsoon showers and the delay is, not yet, a cause for too much concern. The monsoon is currently scheduled to arrive in the central growing regions by 15th June which would be acceptable for the crop. Should the arrival be delayed beyond 20th June, then we would have cause for concern.
– The CFTC COT report showed Managed Money (MM) to have been buyers in the last week. Between MM, Or and NR they bought a net 7,037 contracts in the week ending last Tuesday, but MM still remain short a net 3,918 of the July contract but they will be flat July by the next report and the market may see the N/Z23 spread come close to even. Between MM, OR and NR their overall net long is now 23,847 contracts and whilst this is not an onerous long position, it adds potential fuel to our belief prices will eventually move into the 70’s and will in turn see the funds go flat or even net short!
Conclusion
N23 has been trading between 76.25 and 89.59, being a range of 13.34c/lb for over 7 months. The last two to three weeks have seen much volatility, yet, N23 remains within its nearby range of 79.52 to 87.52. The one certainty in our mind is that this contract month will see continued volatility within this range until expiry, one should avoid if at all possible!!. New crop Z23 has been less volatile, trading between 74.25 and 86.98, being a 1273 point range over the same period. EAP suggest this contract is fully valued in the mid to high 80’s and maintain that end users should only consider a scale down long and/or “on call” fixations from the mid 70’s, to maybe into the 60’s at some point!
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Written by:
Jo Earlam
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