- Jo Earlam
- December 18, 2022
- 11:53 am
- 10 min read
Is Cotton moving back to normality?
My uncle used to say: "In the theatre always leave them wanting more!"....which is why he proved not to be a good anaesthetist!
CTH23 – 81.92 (+0.89)
CTK23 – 82.08 (+0.84)
CTN23 – 82.03 (+0.78)
CTZ23 – 80.22 (+0.58)
Zhengzhou WQK23 – 14,170 (+225)
Cotlook “A” Index – 98.50 (-0.70)
Daily volume – 20,938
AWP – 72.25
Open interest – 200,011
Certificated stock – 8,901
H23/K23 spread – (-0.16)
K23/N23 spread – (+0.05)
N23/Z23 spread – (+1.81)
March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023
Introduction
– Cotton had a much quieter week moving up just 97 points week on week having traded in a 495 point range between 78.80 and 83.75. Futures volume could only average 25,885 daily and as the Christmas holidays approach expect lower volumes in the days ahead!
– January options expired on Friday and probably provided a few fireworks in the day’s trade. March options expire in less than 2 months and implied at the money option volatility at 40.5% remains high and we would suggest too high in the event the Cotton market does effectively nothing in the days and weeks ahead as suggested!
– The CFTC COT report as of last Tuesday saw Managed Money throw the towel in on Cotton by selling a net 7,537 taking their net long to just 10,720 contracts. Other Reportables bought a net 2,855 whilst Non Reportables were net sellers of 1,584 contracts. Between MM, OR and NR their net long is down to an insignificant 12,810 contracts.
– Pictorial evidence is as always provided by our friends at IAG for which we remain. most appreciative.
– The US CPI figure came in lower than expected this week at 7.1% last month compared to an expected figure of 7.3%. This is its lowest level in nearly a year so unsurprisingly markets rallied on the news and cotton was no exception with the March contract closing up 224 pts on the day. This could give the Federal Reserve some breathing room on their interest rate hikes however they still raised them by 50 basis points on Wednesday.
– The world’s largest fashion retailer, Inditex, reported a 24% increase in profits for the first nine months of the year and a 19% increase in sales year on year. Whilst feedback from our many mill friends tells us that the overall end user demand outlook remains very poor, we should not discount this piece of good news.
– The USDA export sales report continued to display the comatose demand of recent months. Whilst much has been made in bullish circles of the impressive pace of US sales early in the season, consistently low weekly sales mean a higher weekly average is required in order to hit the USDA export prediction. Current crop sales of 18,600 bales were reported and friends in destination markets tell us a fair portion of this in fact represented switches from other growths as opposed to fresh demand.
– The CFTC Cotton on Call report based on positions on 9th December showed a small drawdown on the week of 1,471 contracts to the current crop net on call sales position. The overall position stands at 40,359 contracts which is the 8th highest for the week of the year. Notably, the unfixed purchases position for current crop stands at 20,729 contracts which is the second highest ever for this time. As we have previously noted, there is a worrying global trend for the producer to hope for higher prices at this time!
– We have often bleated on about how Cotton seasons that reach the 100’s do not last last for long and that similar patterns are seen subsequently and we refer in recent times to the 21/22 & 22/23 seasons as compared to 10/11 & 11/12 then before that the 94/95 & 95/96 seasons.
– Following the 90’s pattern, prices did not reach the 100’s for 14 years, averaging the mid 70’s and moved in much tighter seasonal ranges. Following the 11/12 seasons we had to wait another 9 years before prices touched the 100’s again but averaged the mid 80’s over that time and also saw much tighter ranges.
– At EAP we think we would be rather bold to suggest we will spend years in the 80’s and 90’s with the current macro situation in the world.
– However what we would say is with world consumption guesstimated by EAP to be between 100-105mb, this remains vastly overstated by the USDA. Moreover, with high priced stocks of yarn and inventory and mills across the globe struggling to make money and operating at 70-75% capacity at best, the likelihood of a breakout to the 90’s is remote at best over the next 6 months at least and until these stocks are worked off!
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!
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.