Plains Cotton Growers Cotton Market Report for July 8, 2021Fri, 09 Jul 2021 09:23:05 CDT
MARKET COMMENTS - July 8, 2021
?NY futures gained about a cent during this holiday-shortened week, as December rose 98 points to close at 86.88 cents.
December continued to struggle near resistance at 89 cents and was once again forced to pull back, as there is still not enough momentum to sustain breakout attempts. The spot month reached a high of 88.89 cents on Tuesday, which was the second highest print after the 89.28 intraday high of February 25, but then values dropped nearly three cents before regaining their footing.
The CFTC spec/hedge report showed that the rally of nearly seven cents since late May has been sponsored by spec buying. On May 26, the December contract posted a low of 82.27 cents and at that time the spec net long position amounted to just 4.85 million bales. From there it grew by 1.60 million to 6.45 million bales net as of June 29, which is the last available figure. Open interest has increased since then, so we can assume that speculators added more longs.
Contrary to popular belief, Index funds have actually sold a few contracts during the same 5-week period, as their net long position dropped from 8.05 to 7.99 million bales. Interestingly, the index fund position has barely changed since last November, despite all the talk about money being allocated to commodity ETFs.
The trade used the rising market to add to its net short position, which grew from 12.90 million bales on May 25 to 14.43 million bales on June 29. With the US crop off to a decent start, growers are now putting additional hedges on, which has kept the spec buying in check.
A sizeable part of this trade net short position is related to unfixed on-call sales, which amounted to 12.43 million bales overall as of last Friday, of which 5.28 million bales were on December. Unfixed on-call purchases were at just 4.61 million bales, of which 2.37 million belonged to December. This 7.15 million bales net position in favor of unfixed sales constitutes substantial buying power below the market.
The early rally on Tuesday seemed to be tied to China’s reserve auction sales, as some traders got excited that all of the offered cotton was readily taken up at relatively high prices of around 116 cents/lb. That’s a stiff level considering that the lots consisted of domestic cotton from the 2011/12 to 2013/14 seasons. However, quantities on offer were just 9k tons per day and the entire campaign makes only 600k tons available between July 5 and September 30.
Although that’s 100k tons more than last season, it pales in comparison to the three years from 2016 to 2018, when China auctioned off four to five times the current amount every year. However, the strong bidding suggests that China’s nearby supplies are tight, similar to what we are witnessing in most other origins around the globe, which puts a lot of emphasis on the coming crops. I will be a nervous three months until we know the outcome and that’s why basis levels will likely remain elevated.
The bond market is starting to shoot holes into the inflation narrative, as 10-year bond yields across the globe have been moving lower, contrary to what analysts were forecasting just a month or two ago. The 10-year US Treasury yielded just 1.29% today, down from 1.73% three months ago, while the 10-year German Bund fell to a negative 0.32% yield.
In other words the ‘reflation trade’, which is what most investors have been betting on, is starting to backfire and if the market suddenly perceives that the post-pandemic growth story is more hype than reality, then we could see financial markets roll over. Since commodities are an integral part of this growth story, we need to keep an eye on how this plays out over the coming days and weeks.
So where do we go from here? Not much has changed since last week, as the cotton market remains caught between strong overhead resistance and solid underlying support. With trading volumes at ‘summer doldrum’ levels, we currently don’t see the force necessary to push the market through support or resistance.
However, from a technical point of view the market is moving into the tip of a long-term triangle, which is defined by resistance at 89.00 and an uptrend line dating back to the March 25 low of 75.34. A break above or below these triangle boundaries, i.e. 89.00 to the upside and around 85.50 to the downside, would likely trigger a reaction by speculators.
For now we stick with a trading range as the most likely course of action, and based on the recent drop in volatility to 26%, the market seems to think so as well.
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