Johnson On Cotton: New Lows Bring Fresh Buying
Given the reduced net long position of specs, some short covering, if not new long initiation, was behind Thursday’s rally. Mills may have also been doing some pricing but whether any new business was occurring is unknown.
One possible explanation for cotton’s defiant activity is the vast majority of Chinese buying of US cotton is not from its mills but related to Beijing’s efforts to rebuilding strategic reserves and not a factor with mill activity.
Cert (deliverable) stocks are down to 95,286 bales with nothing under review. The current level is comparable to 953 contracts, a very small number. First Notice Day for the May contract is not until Tues, Apr 24 but the index funds will roll their long Mays from Mar 29 to Apr 12. With exports showing a significant gain, the level of deliverable stocks is unlikely to grow and there is also the increased likelihood of a strong taker(s).
The May contract is the lead month in regards to open interest and where any short-covering by funds will occur. This behavior may explain the improvement in the May/Jul spread the past few days but the narrowing since mid-Feb is likely due to commercials adjusting their hedges.
US EXPORTS – Last week’s push to new multi-week lows resulted in strong sales of US cotton. As of the week ending Mar 15, 200K bales were sold principally to China and Vietnam with smaller purchases made by Mexico, Turkey, Indonesia and South Korea vs cancellations by Colombia, Taiwan and Mexico. As of the 33rd week, commitments have risen to 11.503 mln running bales, 820K above the USDA equivalent of 10.68 mln running bales. When viewed from statistical (480-lb) bales, commitments are at 11.85 mln bales, 850K above the 11 mln bale figure used by the WAOB/USDA.
Shipments were also quite strong, as well, with 309K bales leaving US ports/borders. China was by far the largest taker with 203K or 66% of the weekly figure. Turkey, Vietnam, Mexico, South Korea and Indonesia accounted for the bulk of the remaining shipments. With 19 weeks left in the year, 6.21 mln running bales have been shipped, 58% of the USDA total. To put the remarkable increase in shipments over the past 2 months in perspective, with the exception of 2010/11, this year’s percent of exports to total (projected) exports is above 2005, 2006, 2007, 2008 and 2009. As for 2012/13, Mexico and China made limited purchases for a weekly combined figure of 87K pushing the total up to 816K bales.
US COMPETITIVENESS/WORLD EXPORT PRICES – Cash prices declined around the globe the past 5 business days due to weakness in US cotton futures. The A indexes dropped .65 to 98.01 with the Cotlook version and off .74 to 97.02 with the USDA calculation. Benin and Mali (part of the Afr Fr Zone) remain the cheapest growths at an average price of 96.65.
Brazil is a close third at 98.00, with Uzbekistan and Greece rounding out the top 5 at 99.30 and 99.55.
The two most competitive quotes from the US, MOT (Texas) and Memphis/Eastern, are 100.00, only 3.35 cents above the cheapest.
Comments made by various informational organizations such as ICAC have indicated very little cotton is left for sale by the African Free Zone and Greece only had a limited amount of cotton for export (1 mln bales per USDA). Hence, despite all the bearish talk of global ending stocks of 62.3 mln bales being the second largest on record, true, available stocks for export is a very, very small number with just over 4 months left in the marketing year.
In addition, mills must have enough cotton on hand to make the transition from this crop year to 2012 which in many instances mean there will not be availability until January 2013.
As an aside to US exports and exportable prices, Cotlook used detailed customs information released yesterday and listed the suppliers of cotton imported by China in February. India was the largest supplier with 54% followed by the US with 25%, Uzbekistan and Brazil with 8 and 6% respectively.
This crop year (Aug to Feb), China imports are just over 2.8 mln tons (12.85 mln bales). In light of the strong level of imports in the past 3 months, Cotlook is raising their import estimate for China to 19.73 mln bales vs the USDA of 18.5 mln bales. If Cotlook’s figure is correct, it will exceed the current record of 19.284 mln bales set in 2005/06.
On-Call – The changes on the latest CFTC On-call report were minor with mill call sales being reduced by 509 contracts involving the May with July up 984. On the producer call purchase side there was a 400 increase in the Jul. On a net basis, there are 8,184 more May to be priced by mills than producers. As for Jul, mills have 11,738 more to price vs producers. The market break of the past few weeks have not seen as much pricing as one would expect by mills suggesting they may be using more options and/or futures to be used to price outstanding contracts with merchants.
US export sales and shipments have made a remarkable turnaround in the past two months and at the very least indicate an increase of 500K to 11.5 mln statistical bales. If sales and shipments are maintained over the next two weeks (Thurs, Mar 29 and Apr 5), the USDA may increase exports by 750K and possibly 1 mln bales to 11.75 if not 12.00 mln bales.
As good as US exports have been of late, they have been even better with other growths such as the Afr Fr Zone, Brazil, Uzbekistan and Greece. Australia continues to make sales as well but there is some nervousness with their final output in terms of quality and quantity in light of the potential for above average rainfall during harvest (Apr to Jun) per their own Meteorological Dept.
The accelerated buying is in response to the ‘partial’ export ban from India but as mentioned in my last report, I do not look for new sales to be allowed and the 2 mln bales sold but ‘in limbo’ are unlikely to be shipped. The Indian government indicated on Mar 12/13 a panel of ministers would meet on or near Mar 27 to review the issue but I see the extension as a delaying tactic.
In my pre-USDA supply/demand reports I will detail the break-down by country with global ending stocks and where and by how much the changes have occurred but of the 62.3 mln bales, China accounts for 32% at 20.08 mln bales.
China’s stocks are up no less than 73% on this year vs 2010 and accounts for 57% of the world increase of 15 mln bales. Brazil and India stocks account for a combined 28% of the world stocks and certainly in the case of India, their ending stocks figure differs from that of Washington. Brazil’s exports are forecast at a record currently and any additional increase seems unlikely meaning as with India, their internal stocks will not be available to the rest of the world.
Combined carry-out in these three countries, China, India and Brazil, are 60% of the world total and account for 70% of the global increase from 2010 to 20011.
Besides closing at a 2-week high, the May contract also closed above its 10 and 20-day moving and is only 3 cents away from the 50-day moving average of 92.67. Friday carries a negative daily cycle but my technician says “it looks too dangerous to sell at this price level”.
Assuming prices do not give back much of its hard-earned gains of the week on Friday, old crop futures will close higher on the week. With only 6 days left in the month and the end of the quarter, spec funds will be giving serious thought as to how much of their new shorts in May or Jul put on the past few weeks will be maintained. I suspect much of the increase in the December open interest is also spec shorting but they are waiting for the outcome of NASS’ planting intentions report to be released next Fri, Mar 30 before making any adjustments.
Weather into and through April will carry increasing importance with the December and rainfall chances over the next two weeks across the High Plains shows at least 2 systems moving across this area but amounts will have to be much better than that of late to offset the unusually warm weather and high winds if soil moisture is to improve.
Sharon C Johnson, @Copyright 2012
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The ICE Dec and Mar contracts gave back 160 and 87 points on the week, respectively, as last week’s inversion between the two contracts gave way to partial carry. Well,