- Jo Earlam
- November 13, 2022
- 1:44 pm
- 10 min read
US$ Index weakness - End of a trend or just a correction?
Be the person your dog thinks you are!
CTZ22 – 88.20 (+1.82)
CTH23 – 86.33 (+1.77)
CTK23 – 85.56 (+1.59)
CTN23 – 84.87 (+1.53)
CTZ23 – 79.56 (+1.16)
Zhengzhou WQF23 – 13,355 (+140)
Cotlook “A” Index – 103.55 (Unch)
Daily volume – 54,693
AWP – 76.74
Open interest – 225,343
Certificated stock – 880
Z22/H23 spread – (+1.87)
Z22/Z23 spread – (+8.64)
December 1st Notice Day – 23rd November 2022
March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023
Introduction
– Cotton traded the last week in a much tighter trading range than we have seen for some weeks and perhaps somewhat surprising to some, considering all the events going on over the course of the last week. For the record, Z22 traded in a 512 point trading range between 84.19 and 89.31 before closing the week 127 points higher than the previous Friday close. Prices were certainly helped at the tail end of the week by news that China was making some efforts to lessen their overly restrictive Covid policies.
– Volume averaged 60,787 futures daily but we can expect things to calm down considerably next week following the end of the GSCI roll period. Overall open interest was 30k lower over the week and following exercise of various December options it may well drop a bit further next week. H23 open interest is at nearly 96k contracts against Z22 at 48k and expect the latter month to be under 10K by end of next week. For all intents and purposes Z22 is consigned to history!
– The H23 contract traded in a much quieter than of late 458 point weekly range between 82.57 and 87.15 before closing the week up 66 points at 86.33. The quieter market is reflected in the fact that implied “at the money” option volatility has dropped over the week and now stands just under 42%. Charts of both Z22 and H23 are included below!
– In Brazil, current offers are coming at $1800/ton ex gin. Noting that figure is near to the cost of production, farmers are hoping for higher prices by January/February when the Safrinha (2nd crop) is planted. If this does not occur then cotton will lose hectarage to corn. Abrapa estimates that production will be 2.946 million tonnes for 22/23 season. Our own estimate of sales by the farmers for 22/23 season is 50% which is under the 5 year average! Quite extraordinary that they did not take advantage of selling more when 3-5 months ago they had the highest prices in over a decade!
– The disequilibrium in commodities prices, along with the high investment & risk associated to planting cotton, is making the farmer think twice. According to IMEA, it is 72% cheaper per hectare to plant corn. Fertiliser prices have come down 10% and defensives have risen 5% in the past 3 months.
– As one can see in graph below, Corn is up 20% compared to same time last year. Soybeans is up 16%, Wheat is up 2% and Cotton is down 6%. As pointed out in previous reports it will be interesting to see if this remains the case come the time the farmer has to make his planting decision.
– Because of the Veteran’s day holiday the CFTC COT report is delayed until Monday. When it is published we expect to see 15-20k increase in speculators positions (MM, OR and NR) following the huge rise in prices from the previous week.
– The US$ Index got hammered in the last week with many commentators suggesting that the bull run is over for the US$!
– However, we suggest that it might be a little premature to write off the US$ just yet! Only if we were to break the 50% retrace of the near 4 year move from low to high on a closing weekly basis would we consider the bull run as over!
– We have long bored readers of the similarities we see for the current 22/23 season to that of the 11/12 season. We have searched our records and note that for the week just ended total export commitments back in the 2nd week of November 2011 were we quote “Total US export commitments now stand at 8.598 million running bales or approximately 79% of current USDA estimate of 11.30 mb”
– Thurday’s report showed that this season we were just under 70% committed. Despite the high % sales that season the 11/12 seasonal lows were actually seen the following May/June. Will this 22/23 season be the same?
Conclusion
The cotton market has found resistance this week just under 90c/lb basis Z22 and 87.15 basis H23. We maintain that for H23 we see prices in the mid to high 80’s as fully valued and any move for this contract into the 90’s as an outright selling opportunity. Our bearish stance is based upon a lack of demand which will eventually be addressed by continued monthly WASDE reductions to world consumption. We would not want to be short Cotton long term under 70c/lb but feel a sideways market is likely for the rest of the 22/23 season!
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*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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