- Jo Earlam
- January 1, 2023
- 1:14 am
- 10 min read
Cotton moves sideways as 2022 ends!
Cotton's most volatile season ever was in 2010/11 when the spot price averaged 133.69 which also happens to be within 10pts of the 22/23 seasonal high so far of 133.79!
CTH23 – 83.37 (+0.73)
CTK23 – 83.45 (+0.72)
CTN23 – 83.38 (+0.75)
CTZ23 – 80.88 (+0.64)
Zhengzhou WQK23 – 14,210 (+60)
Cotlook “A” Index – 99.25 (-0.25)
Daily volume – 16,963
AWP – 74.50
Open interest – 192,426
Certificated stock – 8,901
H23/K23 spread – (-0.08)
K23/N23 spread – (-0.01)
N23/Z23 spread – (+2.50)
March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023
Introduction
– This end of year report will contain a lot of statistical facts and figures because in our experience is a good time for reflection on what has happened before and in turn what to expect next!
– Our last report was 2 weeks ago and we have not missed much, noting that over that time, CTH23 has traded between 81.33 and 89.65, closing in the lower half of that range and significantly below 90c/lb for the calendar year end. More on that later in the report!
– Volume is always light during the festive Christmas and New Year period and this year proved no different noting for the last 2 weeks futures volume has averaged just over 20.5k futures daily against the 5 year average of just over 33k contracts daily! Option activity also remains quiet and it is perhaps a little surprising that implied at the money volatility remains quite high at just over 38%, versus the 5 year average of just under 25%.
– We only state this because for almost 2 months the Cotton market has traded in a relatively tight 12.42 c/lb range between 77.50 to 89.92 basis the March contract and volatility would normally have dropped further. We feel it is only a question of time as to when it does and for sure implied at the money option volatility will drop if prices stay within the aforementioned range!
– In the 21/22 season we saw a 72.63c/lb seasonal range and a 63.58c/lb range in the 22/23 season so far, against the 21st century seasonal average of just under 38c/lb. This data assumes a 1st June start and 31st May seasonal end date and accounting for futures months of the same season I.e. Z, H, K & N!
– No doubt that the last 2 seasons have far exceeded normal seasonal ranges and we have covered in previous reports what to expect next in that regard! For reminder purposes there have been 4 especially volatile seasons this century and each time one volatile season occurred it was subsequently followed another one other before reverting to a more normal seasonal range. Taking out the 4 most volatile seasons of the 21st century to include this one the market reverts to a more normal 27c/lb range!
– A line chart of the spot price over the 2022 calendar year is enclosed below.
– The CFTC Cotton on Call report based on positions on 23rd December showed net on call sales positions for current crop of 39,065 contracts, this represents only the 10th largest position for the week of the year on record dating back to the turn of the century when records began. The March ’22 position stands at 17,759 contracts and is the seventh highest for the week. Over the course of the last couple of months mills have been drawing down their positions in a reasonably orderly manner and, at this moment in time, the on call sales position does not stand out as a significant pocket of support to the market.
– The USDA export sales report dated 22nd December 2022 showed net sales for 2022/23 of 82,300 bales and for 2023/24 of 3,500 bales. It is perhaps an indication of how low expectations are right now that this was greeted relatively positively by the market. Total sales for 2022/23 now stand at 9,133,500 bales, just over 3.1 million bales short of the USDA export target. This is an achievable target, but it is worth noting that weekly sales have been well off the pace required to reach this target for the last seven weeks now!
– The physical enquiry over the last 2 weeks has picked up a little in all fairness and whilst it is a step in the right direction it does not represent any sort of significant change in overall sentiment.
– It is difficult to argue against the fact that the cotton market is trading sideways for the last 2 months and the likelihood is the “money” will do little until there is a clear move out of the current range either up or down.
– We remain of the opinion that the eventual breakout of the range will be to the downside just as it was in the 11/12 season which we remain of the belief is most similar to the 22/23 season.
– If EAP are wrong then it is the “money” have the firepower to take the market much higher than we think is possible right now. This can definitely happen but we see the likelihood as small bearing in mind the cotton fundamentals, which we emphasise are burdensome yarn stocks, underutilisation of spinning capacity, that seems unlikely to improve for 4-6 months at least, and the fact that mills cannot make money based on the current spot price and high basis of all cottons at the present time!
– In India, the basis has been dropping despite the fact that cotton arrivals remain below the pace of last year as farmers hold back from delivery. The recent squeeze on short International merchants that were forced to deliver to Indian mills is vastly reduced and as a result and as arrivals start to pick up will mean that the Indian basis will have to get cheaper as the Cotton searches for a home. Bangladesh mils will ultimately be the beneficiary where logistically nearby Indian spot cotton should be more competitive than other foreign cottons as the 1st quarter approaches!
– Turkey has been dead since August but in fairness there has been a slight uptick in enquiry in this market and reported by one of our closest friends on the ground there, noting that the largest mill there has restarted a couple of their units that have been closed for months!
– On a technical point of view the cotton market is trading above its medium (50 day) and below its long term moving averages (100 and 200 day) as can be seen on the chart below.
– Whilst the market is clearly trading in a relatively tight range at the present time we see the wider range of 72.00 and 97.00 on a closing monthly basis as more significant. A close outside these levels will cause a rethink as to the longer term viewpoint for Cotton.
– On a money point of view point the latest CFTC COT report showed Managed Money to have added to their small long position.
– Managed Money (MM) bought a net 3,477 contracts taking their overall net long to 15,981 contracts. Between MM, OR and NR their overall net long now totals 19,248 contracts.
– Much talk of a lack of plantings in the USA for Cotton on account of competing crop prices remains a hot topic and how Z23 new crop is a steal at 81c/lb. We remind readers that there are more than 10 months before that contract expires and an awful lot can happen over that time period. If prices of the current crop contracts of H, K and N23 remain under presume then so will Z23 albeit unlikely to drop by the same extent!
– There also remains an unfilled chart gap in the mid 70’s and noting that gaps almost always get filled at some point, we think it is a little early to get over enthusiastic about Z23 when no virtually no spinning mill can spin a bale right now without making a loss!
On the Macro front we have China ending their zero Covid policy, an ongoing Russia/Ukraine war, a looming recession and a US$ that could move either way which translates to many outside factors continuing to influence Cotton and other commodities in 2023!
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
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