- Ben Williams
- November 26, 2022
- 9:29 am
- 10 min read
Will hope turn to despair following the Mediterranean conference in Thessaloniki
"One thing I know, that I know nothing. This is the source of my wisdom."
Socrates
CTH23 – 80.18 (-2.72)
CTK23 – 79.53 (-2.67)
CTN23 – 72.64 (-2.60)
CTZ23 – 76.00 (-1.93)
Zhengzhou WQF23 – 13,420 (+5)
Cotlook “A” Index – 101.35 (unch)
Daily volume – 11,721
AWP – 74.61
Open interest – 191,610
Certificated stock – 8,901
H23/K23 spread – (+0.65)
K32/N32 spread – (+0.89)
N23/Z23 spread – (+2.64)
March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023
Introduction
– In a USA Thanksgiving holiday week, Cotton traded in a much smaller than of late 436 point range, between 79.30 and 83.66 before closing the week down 360 points. Volume was understandably much lower, averaging 24,910 futures daily whilst puts and calls traded equally and averaged 4,202 daily.
– Implied at the money option volatility remains quite high at 41.30%, but we repeat earlier comments will likely drop fast in the event we stay within an expected 70c to 85c trading range basis H23 in the days and weeks ahead. A full breakdown of traders positions in H23 options can be found by clicking on the link below.
– After hopes that China was edging away from it’s zero covid policy restrictions have been put back into place in many parts of the country in response to an escalation in cases. Whilst restrictions so far have not been as draconian as those seen in the Shanghai (and elsewhere) lockdown of earlier this year they will still act as a drag on economic performance.
– China has a real issue with vaccine uptake amongst the elderly which leaves many vulnerable from a renewed full scale outbreak. Despite the often heavy handed measures to date the Central government remains reluctant to compel citizens to get vaccinated. Until this is resolved it is hard to see a solution that does not involve continued restrictive measures, with the attendant economic damage that such measures inflict.
– Regular readers will be more than aware of our belief that 2022 has many similarities with 2011. To date, one discrepancy has been that, despite the negative reports on the mill side we have not seen the large scale cancellations that we saw in 2011. At least not until this week’s USDA export sales report which saw net cancellations of 116,400 bales, led by net reductions of 109,500 bales for China and 15,400 bales for Pakistan. Time will tell if this is this is a one off or the start of a more worrying trend, though our money would be on the latter.
– The CFTC Cotton on Call report dated positions on 18th November showed little change in the net on call sales position with a reduction of only 493 contracts for current crop. However, the Dec position was drawn down by 4,916 contracts, whilst the March position increased by 4,392 contracts which suggest there was much rolling of unfixed sales over the course of the week. The overall net on call sales position for current crop stands at 45,767 contracts, which is historically the seventh highest position for this week of the year.
– A chart of March this year and one of March 2012 are shown over each other for comparison! Whilst the timings are off slightly, the directional trend is not. The final low in the 11/12 season was at the end of the season and under 70c and was half what the record high made by the Z11 contract the previous summer. A familiar story to the current season with the main difference being in the 11/12 season the USA had sold 79% of the USA crop at this point, versus the 70% so far sold this season!
– Interestingly and just like we have today, the competing crops were all far above their historical averages but largely stayed high all the 11/12 season. Despite this, Cotton still went sideways to lower when competing crops offered much better value!
– EAP sent a group to the Mediterranean Cotton roads conference in the historic city of Thessaloniki this week! What a fantastic location and opportunity to discuss the goings on for the Greek, Spanish and Turkish cotton industry.
– We can report that the attendance, quality and organisation of the conference is a tribute to how far the European industry has progressed in recent times!
– Europe will not try to boast they are ever going to be the biggest but Nafpaktos Yarns in Greece is expanding with a brand new spinning unit and we even discovered a brand new Cotton production in Sicily…yes Sicily! Both operations are somewhat niche but successful and can have much to do with the fact that the € is trading at 60% of its value to the US$ of 15 years ago! In short summary, Europe can compete in the world like never before, because of their weaker currency!
– However, on a less heartening note, upto 70-75% of Greek and Turkish farmers have yet to fix their cotton with the ginners! Many participants here were encouraged by a speech by a veteran and rightly respected USA broker, who suggested the bottom is in for Cotton. Subsequent chats to friends and acquaintances clearly gave many some “HOPE” and perhaps reason to hold off from fixing at current prices! A subsequent near limit down move in a shortened day’s trading on Friday may have given them cause to have a rethink and perhaps take what is on offer!…we certainly hope so!
– Hope in the world of trading is something that very, very rarely comes off, especially in the current demandless Cotton environment that we do not see changing until the end of the 1st quarter at best!
– Yarn stocks in Turkey are in excess of 300k mt (not forgetting to mention a huge and rising non USA Cotton inventory). Our farmer in Turkey has lost badly on Cotton this season and the longer they hold off from fixing, the higher the likelihood that that their hope will turn into despair and ultimately capitulation!
– Unlike the previously suggested “HOPE” scenario, the capitulation one is a regular occurrence when trading ALL commodities, that in our experience and for Cotton, will likely occur sometime next year and thereby end the current bear market. We realise we might be in the minority with such a viewpoint but it won’t be for the first time!
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:
Ben Williams
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