Market Report

Weekend Cotton Bullets – 28/08/2022

USDA Export numbers are simply wrong

It's easy to come up with new ideas; the hard part is letting go of what worked for you two years ago, but will soon be out of date!

CTZ22 117.68 (+3.57)
CTH23 114.37 (+3.54)
CTK23 111.16 (+3.34)
CTN23 106.00 (+2.89)
CTZ23 90.30 (+1.72)

Zhengzhou CF301 – 15,030 (+15)

Cotlook “A” Index – 132.25 (Unch)

Daily volume – 18,944
AWP – 104.48
Open interest – 209,262
Certificated stock – 4,552

Z22/H23 spread – (+3.31)
Z22/Z23 spread – (+27.38)

December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022

Introduction

– In another volatile week for Z22, prices moved in a 719 point range between 111.21 and 118.40 before closing the week up 167 points at 117.68. Average daily futures volume was less than half the previous week at 19,083 contracts with options also much less active at 5,955 daily. Calls have traded more actively than puts and volatility remains high at just under 44% and not surprising in view the average daily move of Z22 in the last week has averaged 358 points!
– Cotton has been up 5 of the last 6 weeks and nearly 15% up in the 2 weeks post the 3mb reduction of the USA crop in the August WASDE. Over the same time period Corn is up 10%, Wheat is up 9% and Soy up 6%. All these markets look like they can move a bit further upwards!
– Conversations with many export markets revealed standstill activity in the face of a rising futures market. India, Bangladesh and Turkey have mills either stopping altogether or operating at 25% to 50% capacity in many instances. The Chinese Reserve bought no Cotton at auction this week but in Pakistan widespread flooding is not helping their local crop!
– The “Money” can often railroad what is going on for the spinner as funds add to their long positions in the face of the smallest USA crop in years. In turn our spinner can only look in bewildered amazement at a rising futures market in the face of negative yarn margins and high priced and largely unfixed on call purchases against Z22 and ask themselves “What do I do next?” More on that later!
– On the macro front we are facing an energy crisis in Europe with ever increasing prices eating in to consumers’ disposable incomes. As winter approaches the squeezed consumer will chose to keep the heating and lights on ahead of buying new clothes. In other words, we will continue to see significant headwinds and shrinking cotton consumption.
– At the annual Jackson Hole symposium Fed Chair Jay Powell, gave a hawkish speech in which he stated that, in order to tackle inflation, interests rates would need to stay high for an extended length of time and that is would mean lower economic growth for a sustained period. Crucially, the Chair opined that there would “very likely be some softening of labour market conditions” and “some pain” for households and businesses – the squeezed consumer once again!!
– Somewhat improved crop conditions and rain has come too late in areas of the USA Cotton belt with the potential to hinder fiber quality rather than improve yield. FSA this week reported planted US acreage of 13.315 million acres which is 1.037 million above the June number. Crucial of course will be the extremely high abandonment levels in Texas, but it should be noted that acreage was increased 284,000 acres in the Memphis Eastern region.

– The weekly COT report saw Managed Money once again add to their long positions having purchased a net 6,016 contracts to take their long to 50,778 contracts. There were little changes to Other and Non Reportable positions and between MM, OR and NR their overall net long is 58,160 contracts. Thanks as always to our friends at IAG for pictorial evidence of the fact.
– The CFTC cotton on call report, based positions on 19th August showed an overall increase in unfixed net on call sales of 1,179 contract week on week. Interestingly, this was primarily driven by a 2,240 contract increase in the March position.
– There is quite an interesting comparison to be made between weeks 33 of this year and of last year. The current Dec on call position is the second highest recorded position for the week at 36,339 contracts, just pipped by 2021 at 36,500. For the March however, we currently have a paltry 8,032 contracts compared with 26,093 contracts at the same point a year ago. For May, the comparison stands at 6,494 contracts this year compared to 12,496 whilst July is 12,712 against 30,515!!!
– The USDA newly formatted weekly export sales report showed sales of 1.495m RB that spiked the market on publication. Nobody who has been trading Cotton over the last 2 weeks believed this number because it’s simply not true and as a result was subsequently taken down from the USDA website. There is still no news about what the real figure is and we can only say that the last week in the physical Cotton market was as dead a week as we can remember!
– In Brazil, Abrapa’s plans to increase planted area by 15% for next crop year is in the news. Cost of production should remain high, but we hear reports of slightly improved farmer prices for fertilisers. Domestic market during the first semester was not good, but upcoming presidential elections and World Cup should improve the scenario. Dollar pundits expect a near term range between 5,20 and 5,40 Reais.
– The spinner situation is difficult. Is it cheaper to just close out unfixed on call purchases with the merchant? Can they roll the shipment forward or is simply better to close out the contract than perform something that will lose more by producing the yarn than just closing out. Further hurricane inspired rises in the next 2 weeks may make the decision easier!

Conclusion

EAP do not rule out a potential retest of the low to mid 120’s over the next 4-5 weeks on fund buying and/or a hurricane inspired rally following the very bullish August WASDE report and last week’s speculative buying that may well continue a little longer. This is a period of extreme volatility and EAP ideally prefer a stand aside approach for the next week or two, until prices calm down somewhat. Longer term, EAP remain of the belief that the 22/23 season will prove to be an inverted one, with the final low at the end of the season and scale up selling into strength over the next 4/5 weeks will likely prove to be prudent.

Useful links

*Please note that we only share CFTC CTO on weekend reports. 

Written by:

Jo Earlam

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.