- Chris Williams
- January 15, 2023
- 3:36 pm
- 10 min read
A bearish WASDE has soured the market's mood
Enjoy life while you can, for tomorrow is uncertain.
CTH23 82.29 (+0.25)
CTK23 82.60 (+0.33)
CTN23 82.35 (+0.52)
CTZ23 80.08 (+0.71)
Zhengzhou WQK23 – 14,345 (-10)
Cotlook “A” Index – 97.86 (-2.25)
Daily volume – 38,993
AWP – 74.48
Open interest – 201,227
Certificated stock – 8,900
H23 / K23 spread – (-0.31)
K23 / N23 spread – (+0.19)
N23 / Z23 spread – (+2.27)
March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023
Introduction
– Cotton prices fell 339 points in the last week having traded in a 632 point range between 81.65 and 87.97. The week saw a higher high and a higher low than the previous week, but still closed within points of the lows and certainly felt like it could never find much positive momentum following Thursday’s bearish WASDE!
– Futures volume was up, averaging 37,214 futures daily and for the 1st time in as many months as EAP can recall there was more put options traded than calls, especially on Friday where put buying outnumbered calls by more than 4 to 1! Despite the alleged massive Index fund rebalancing in the last week, March open interest fell quite sharply. We remain highly sceptical of the circa 12-18k of buying being touted by some which quite clearly did not happen! Those who bought the rumour in the low 80’s and sold on Monday will have done well but others will be nursing some nasty losses!
– In the last 9 weeks the weekly close for H23 has been in a 540 point range between 80.18 and 85.68. The daily average range dropped from last week’s 354 points to a more normal 249 whilst H23 implied at the money option volatility closed down at 37.3%. We fully expect this to drop further if the sideways action continues as we expect!
– The CFTC COT report after the close showed Managed Money (MM) to be net sellers for the 2nd consecutive week reducing longs by 2,295 contracts to just 9,110 contracts. Other and Non Reportables (OR and NR) were net buyers of 2,370 and 889 each. between MM, OR and NR their net long is now 16,197 contracts.
– The Harpex index represents the price to charter container ships. The index is now back to the level it was at two years ago in another sign of a slowing of post-Covid pent up global demand and a likely return to “normal” for global container freight rates.
– In Brazil, the past two weeks have been quiet due to collective holidays and NYE, with buyers acquiring just enough to meet immediate cover.
– We finished the week with the depreciation of dollar along with bearish WASDE figures making the Brazilian cotton too expensive for export business. US$ is down 5% in Brazil since the beginning of the year. The graph below shows a comparison of NY vs. Cepea daily change in percentage move.
– According to Conab, weather conditions are favourable to the development of the crop throughout the country. around 30% of the 22/23 crop has been planted to date.
– Data released by the Ministry of Economics indicates that in the month of December 2022, 175.7 thousand tones were exported, at an average price of US$ 1,898.30/t. Compared to December 2021, where Brazil exported 270.5 thousand tons, at an average price US$ 1,802.00/t. This represents 95 thousand tons less in 2022, but an increase of 5.3% in average price per ton. The second graph below shows Brazilian monthly export sales for the 2022 year.
– UK online retailer ASOS’ sales for the four months leading up to Christmas disappointed at £1.3 billion. Turnover in the UK was down 8% whilst revenues in the U.S. and Europe were down 31% to £130 million. Weaker consumer sentiment has been the driving force and has resulted in office and storage facility closures. In addition, 35 unprofitable brands will be withdrawn as part of a £300 million cost mitigation measure.
– This week the HeimTextil trade event has taken place in Germany, the main trade event for home & contract textiles. Sustainability has been at the forefront with BCI, GOTS, Sedex etc being seen as a basic standard for cotton, whilst man made is promoting its sustainability criteria based on recycling and technologies that allow decomposition.
– Most businesses confirm the very challenging times experienced during the second half of 2022 based on demand concerns and relatively high stock levels. Conditions are indicated as having improved somewhat recently. The upswing in international travel acts as a driver in the hotel demand cycle.
– Economic research from FRED shows that inventories of non-durable goods such as apparel and piece goods have risen significantly year on year. The value of inventories expressed in millions of dollars show that in January 2022 inventories equated to $29.520 million and before rising consecutively to $43.164 million in November 2022. Despite some retailers reporting good sales for Black Friday we suspect this figure remains at alarmingly high levels. Expressed as a ratio inventories to sales also show a significant uptick (chart below).
– Specifically, the FRED sales to inventory ratio for apparel continued to climb up to the end of November. With the exception of a spike during Covid this is the highest level this indicator has been going back to 2007 and offers a good clue as to why retailer demand has been so subdued of late.
– The market will be closed Monday for Martin Luther King Day.
Conclusion
The cotton market has found resistance just under 90c/lb 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 for the rest of the season ending 31st May 2023. 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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Written by:
Chris Williams
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