Plexus Cotton Market Report - July 15, 2021Fri, 16 Jul 2021 09:35:53 CDT
MARKET COMMENTS - July 15, 2021
?NY futures rallied to new contract highs this week, with December gaining 217 points to close at 89.05 cents.
December finally cracked through long-term resistance and established new intraday and settlement highs at 89.95 and 89.81 cents, respectively. However, speculators and possibly index traders spent a lot of bullets over the last two sessions, without much to show for it, as open interest jumped by 10,560 lots (1.06 million bales) to 233,963 contracts on Tuesday and Wednesday.
Despite all of these new longs piling into the market, we have yet to see a 90 cents print, which has probably been forestalled by the large amount of grower selling waiting at and above that level. While we saw an increase in volume when the market broke out to new highs yesterday, the 30k lots in futures didnít generate enough momentum to force a stronger move and today there was no follow through, as just 18.7k contracts changed hands.
The WASDE report earlier this week had something for both the bulls and the bears, as US numbers were slightly bearish, while global numbers appeared to be supportive overall.
The US crop was raised to 17.8 million bales, based on 10.5 million harvested acres and a yield of 814 pounds/acre. Since the 10-year average is at 845 pounds/acre, it still leaves room for improvement if growing conditions remain favorable.
The most bullish argument is probably the steady rise in global mill use, which is now predicted at 123.16 million bales for 2021/22, up from this seasonís 118.60 and last seasonís 102.85 million bales. As long as demand remains strong, it will be difficult for the market to come under too much pressure, even if crops continued to progress well.
Global production went up 0.52 million bales to 119.39 million bales, which still leaves a seasonal production shortfall of 3.77 million bales. Whatís quite interesting though is where output is expected to increase next season.
When we look at the production total of the US, Brazil and Australia, which are price setters in the export market, we notice a sizable jump in the coming season. These three important machine-picked origins are expected to produce a combined 34.95 million bales, or 6.79 million bales more than the 28.16 million bales in the current season.
Interesting too is the availability of these bales, with 17.8 million (US) arriving at the end of this year and 17.15 million (Brazil + Australia) coming in mid-2022. This should allow for a steady flow of machine picked cotton in the supply chain.
The USDA took Chinese imports down 1.0 million to 10.0 million bales in the coming season. Thatís bearish, especially since China bought over five million bales from the US this season and if China isnít as active on the import front, US shippers are going to feel it.
The US is already starting the new season on August 1 with around 2.5 million bales fewer export sales on the books and since Brazil and Australia are in a similar situation, it could lead to fierce competition down the road.
Even though global inventories were down 1.56 million to 87.74 million bales at the end of next season, ROW ending stocks remain adequate at 53.16 million, down just 0.57 million from last month and slightly higher than the 52.69 million bales of this marketing year. In the previous three seasons ROW stocks averaged 49.49 million bales, with a range from 43.09 to 61.02 million bales.
US export sales amounted to 170,100 running bales of Upland and Pima cotton for all three marketing years combined. There were 13 markets buying, while 19 destinations received shipments of 189,300 running bales. The market seemed to be disappointed about the low shipment number, but we believe this was due to the 4th of July holiday and we expect to see a bounce in the next report.
Unfixed on-call sales rose by 0.43 million to 12.87 million bales, whereas unfixed on-call purchases were up just 0.01 million to 4.62 million bales. This massive imbalance of 8.25 million bales in favor of unfixed sales represent a lot of buying power underneath the market.
So where do we go from here? Spec and index fund buying has been behind the marketís push to new highs, as open interest rose by about 17,000 contracts during Decemberís move from 85 to 90 cents since the beginning of July. The trade has been a steady seller into strength and based on the struggle to overcome the 90 cents level, we assume that there is still a lot of overhead trade selling waiting.
Inventories are tight, but as long as the promise of nearly 18 million bale US and a 120 million bale global crop holds, there is no need for the trade to panic and pay up.
Speculators could try to force the issue, but they have already spent a lot of money without getting very far and will probably back off for now. We might settle into a slightly higher trading range, but it will take a weather or macro event to move the market more than a few cents in either direction.
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