Plexus Cotton Market Report For June 24, 2021Fri, 25 Jun 2021 08:43:26 CDT
MARKET COMMENTS - June 24, 2021
?NY futures rebounded this week, as December jumped 267 points to close at 86.73 cents.
December regained its footing this week on strong fundamental support, which changed the technical picture back to friendly after the market failed to confirm a triple top by holding above the 80.99 swing low.
However, despite the positive price action we are missing the momentum behind this up move, as volume has dropped for six consecutive sessions and we ended up trading just 16k in futures today. This means that the market is probably not quite ready to break through overhead resistance and is still looking for a trigger.
US export sales were quite good last week considering that there is very little left to sell in current crop and that the new crop basis is about 200 points stronger than usual as merchants seem hesitant to push business. Total sales of Upland and Pima cotton amounted to 232,700 running bales, with 14 markets buying and 20 destinations receiving shipments of 221,000 running bales.
Total commitments for the current season have reached 17.3 million statistical bales, of which 14.4 million bales have so far been exported. Shipments need to average about 307k running bales over the remaining weeks of the marketing year in order to get to the current USDA projection of 16.4 million statistical bales.
But even if shipments were to fall slightly short of this target, it doesnít change the fact that supplies in the US are going to be extremely tight over the summer months and that early new crop supplies will be eagerly sought-after. This is evidenced by the fact that the Dec/March inversion is growing. According to our calculations, we probably donít have more than half a million bales left for sale.
Total supply amounted to 21.96 million bales this season, of which 19.6 million bales have been committed for export (17.3) and domestic mill use (2.3). This leaves 2.36 million bales, but of that we need to reserve around 1.9 million for exports and mill use in the August to October time frame.
Export sales for August onwards currently amount to 2.35 million statistical bales and we estimate that around 60% or 1.4 million bales of those will be supplied from current inventories. In addition to that we will have to reserve around 0.5 million bales for domestic mill use.
The fact that just 11.5k bales of the 165.9k bales in certified stock have been changing hands so far during the July notice period, speaks to this extremely tight stock situation. Current owners obviously do not want to part with their cotton! After todayís session open interest will be close to zero, which means that the July delivery is basically done.
Weather across the cotton belt has been conducive to plant development, with moisture levels still adequate in most areas. West Texas has been hot with temperatures near 100 degrees and is in need of more rain, which is expected to arrive this weekend when a cold front dips down into the region. The current forecast calls for heavy downpours, accompanied by high winds and some hail. However, on balance this will be beneficial for the crop.
There were some stories out of China about additional imports, either by the Reserve directly or via new import quotas, as the Xinjiang issue forces the local textile industry to use more foreign cotton and yarn in order to make its export products. While this is nothing new, the fact that China is apparently waiting for an opportunity to absorb more cotton from the ROW solidifies support, especially since available stocks are so tight.
Traders are starting to hone in on the June 30 Planted Acreage report, with many expecting a lower number than the 12.04 million acres the Prospective Plantings report showed in March. Most guesses seem to be in the 11.2 to 11.7 million acres range. While the market would probably have a bullish reaction to a lower number, letís not forget that what matters is how many acres ultimately make it to harvest and what kind of yield was can expect.
Last year the US planted 12.1 million acres, but harvested only 8.7 million with a yield of 825 pounds. Given the decent amount of moisture at this point of the season, we expect to see fewer abandoned acres, so if we were to plug in a harvested acreage number of 10.0 million with a 5-year average yield of 858 pounds, we arrive at a potential crop of 17.88 million bales. Even at 9.5 million harvested acres it would still amount to 16.98 million bales. The point is that we should not to get too hung up on next weekís Planted Acreage number!
So where do we go from here? December is once again on its way to challenge the previous peaks in the 88-89 area. A break above these key resistance points would open the door for an explosive move into the 90s.
However, the lack of volume and the prospect of more rain in West Texas leads us to believe that the time is not yet ripe for a breakout. We therefore feel that another pullback is more likely.
The volatility skew is still heavily in favor of a rising market, as a 10-cent upside strike is still worth nearly twice as much as an equivalent downside strike. This shows that traders lean towards higher prices down the road. Whatís needed is a trigger, be it a weather event or something from the macro front, like higher inflation or a weaker dollar. Until that happens, we will probably remain stuck in the summer doldrums.
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