Plexus Cotton Market Report for March 11Fri, 12 Mar 2021 08:23:41 CST
In the Plexus Cotton Market report for March 11, NY futures rebounded this week, as May gained 121 points to close at 88.35 cents, while new crop December added 89 points to close at 84.89 cents.
This week’s price action was a mirror image of what we saw last week, when May spiked to a high of 95.60 and then collapsed. This time around we saw May hammer out a low of 82.87, only to rally 548 points from there by the end of the following session.
Open interest in May and July stood at 150,784 contracts this morning, which is down 13,427 from a week ago. But considering that the market offered mills and merchants a chance to greatly reduce unfixed on-call and basis-long positions, this relatively small drop in open interest looks like a missed opportunity.
The on-call situation improved only slightly last week, as unfixed on-call sales in current crop dropped by 0.48 million to 5.65 million bales, while unfixed on-call purchases were down by 0.13 million to 1.06 million bales. The net difference still amounted to a sizeable 4.59 million bales of buying power.
While this sharp correction has introduced some uncertainty into this 11-month bull market, none of its supporting factors has disappeared. If anything, this price break accelerated the selling of remaining US supplies and has thereby made the situation more dangerous for the shorts.
US export sales amounted to an impressive 343,000 running bales of Upland and Pima cotton for all three marketing years combined. Participation remained widespread with 20 markets buying, while 26 destinations received shipments of 375,300 running bales.
The pace of shipments continues to be substantially above the 290k pace needed to make the current USDA estimate of 15.5 million bales, which is why most analysts expect exports to reach at least 16.0 million bales.
Total commitments for the season have now reached 14.9 million statistical bales, of which 9.2 million bales have already been exported. Last year we had 15.4 million in commitments, but only 7.95 million bales were shipped at this date. In other words, the amount of outstanding sales is a lot smaller than last season.
The EWR (electronic warehouse receipts) report confirms the tightness in the US, as there were just 8.19 million bales still ‘open’ as of this morning, which compares to 11.77 million bales a year ago. Meanwhile, bales ‘under shipping order’ are at 2.49 million bales vs. 2.31 million bales last year, which should ensure strong export numbers going forward.
The WASDE took the US crop down to 14.7 million bales and we might lose another 100k bales in the final tally. If we add beginning stocks of 7.25 million bales to the crop number, we get a total supply of 21.95 million statistical bales. Of that we have so far sold 14.9 million bales for export this season, while mills are going to use 2.3 million bales by the end of July.
This leaves 4.75 million bales, but we need to reserve at least another 1.5 million bales for exports and domestic mill use during the August to October period. This means that there might be just a little more than 3 million bales of US cotton still available for sale.
In other words, supplies are getting tight and thanks to this price break in NY and the fact that merchants don’t want to hold inventories past the July/Dec inversion, we may get as close to a ‘sold out’ situation as we have been. Definitely not the stuff that bear markets are made of!
With the USD 1.9 trillion stimulus package now a reality, the US financial casino is in full swing and the stock market is racing from one new record high to another. The consensus has US GDP expanding at a 7-8 percent annualized pace, while China expects its economy to grow by over 6 percent this year. The forecast for Europe is at a more modest 4%, but overall we expect to see a strong rebound across the globe, which should lead to higher consumption.
Commodities remain the most undervalued in relation to the S&P 500 in at least five decades and we should therefore see more money being allocated to the commodity sector, for diversification and inflation protection purposes.
So where do we go from here? After dropping nearly 13 cents from high to low in just ten sessions, the market seems to have regained its footing as it managed to recoup 40% of these losses in the last two sessions. Today the May contract also pierced through its short-term downtrend line and this should neutralize the correction.
We still believe that the core spec long has no reason to exit its position and this could spell trouble for the many trade shorts that remain in the game. With the US selling out fast, with new crop still a great uncertainty due to the drought in Texas and with financial markets in a euphoric mood, we believe that the odds are shifting back in favor of the bulls.
The fact that the July 100 strike call traded at 229 points today and the 110 strike call fetched 118 points tells us that some traders still believe in the explosiveness of this market. We are in the camp that gives the market better than even odds to see new highs over the next three months, as the potential for a short squeeze remains, especially if it doesn’t rain in Texas.
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