Cotton futures recently have continued to move higher despite overtly bearish data from the USDA.  This is in addition to what appears to be a renewed souring of relations between the United States and the People’s Republic of China.  I was told early in my cotton career to never listen to what the Chinese are saying, only watch what the do.  The buying of US cotton recently from Chinese entities in recent weeks stands out as a great example of this.  Although the current demand out of China might not be “mill” demand, it is demand nonetheless.  Further, if it is demand from the PRC state reserve, the recent purchases of some 900,000 bales of US cotton is just the tip of the iceberg.

The idea of ailing global demand for cotton has yet to play out in actual data.  It has only shown up in the USDA’s WASDE figures.  Given the unprecedented uncertainty brought by the Wuhan Coronavirus, it may be important to keep in mind that the WASDE is, by matter of name, an estimate.  It is many moving targets constantly subject to revision.  The WASDE, while usually considered gospel to analysts and traders alike, is being openly doubted by the recent price action.  Having received the first estimates from the USDA for the upcoming crop year, we feel the USDA must be simply spit-balling their figures.  What statistical methodology and economic models account for the current global pandemic and economic chaos?

I do not envy the bean counters at the USDA in their effort to quantify global consumption of cotton in the current crop year and especially not in the coming crop year.  One thing is for sure with commodities, the virus of low prices is the cure for itself.   The longer prices stay depressed, the less interested growers will be to plant cotton.  Even with myriad of government subsidy programs around the globe to distort this economic truth, producers will become tired of a row crop the longer prices stay low.

While the recent Chinese buying has helped lift the prices on the ICE #2, it now appears traders are looking for some type of squeeze in the July20 contract, as well.  The July20-Dec20 spread has moved from over 3.00 cents of carry to a slight backwardation.  Although there is no certificated stock to defend the July20 contract, the USDA say’s there will be 7.10 million bales of US cotton at the end of July.  It’s very hard for markets to stay inverted with a massive build up of ending stocks.  Further, the cotton the Chinese are buying is not the cotton that would be tendered against the board, leaving plenty of cotton that could be certificated.  Unless the USDA is way off on their current marketing year figures, there should be no squeeze.

Looking at the daily chart for the July20 contract, we see a fairly steep recovery from the lows, although not quite a perfect V-bottom.  This week’s push to new highs has failed to garner any follow through momentum, leaving bulls slightly disappointed.  Open interest remains low and hasn’t really increased on the price rally.  The rally from the lows appears to be running out of steam.  Nearby support is 53.20, while the next major resistance is around 61.00

 

 

The current partial government shut-down here in the USA continued to be a drain on many markets during the opening days of 2019.  Additionally, the shut-down is delaying any new numbers from the USDA, FAS and CFTC, which are all government entities.  Cotton needs these numbers to help guide price discovery on the ICE #2 Cotton contract.  Going on two weeks now, the lack of fresh data adds more uncertainty to the market.  Speaking to those in the physical cotton trading business leads me to believe that there is demand for cotton at the current prices, although nothing huge.  While the price has dropped around 9 US cents/lb over the past month, the selling basis strengthened only about 1.00-1.50 points for US bales or about half of what would be considered normal for such a drop in futures prices.

Because there is no fresh data to guide the market, looking at the technical situation might be helpful.  Today’s rally marked a three-day reversal pattern known as a morning star doji according to Japanese candlestick theory.  The doji session, in which the open and close are the same, is a warning signs to the bears that momentum has stalled.  However, it is the large green up candle today that confirms the warning.  In the context of the large down move and range break out of the last month lends validity to the potential reversal.

Despite not being able to see fresh data from the CFTC on-call report, I imagine it is still showing the same general crop year trend as in recent years.  That means, the producer (mostly US in this case) has already priced much of this year’s crop, leaving a limited number of natural sellers against the March19, May19 and July19 contracts.  While on the other side, the mill still has huge quantities to fix (buy futures) during the same period.  The same dynamic has helped the market maintain a somewhat bullish seasonal bias during the first half of the calendar year in recent experience.  In very simple terms, there are more natural buyers than sellers for the remaining crop year contracts.

by Andy Ryan

andy.ryan@bnacommodities.com

 

 

Cotton futures tried to build on yesterday’s rebound by beginning today’s session higher.  In the end, the market fell to new lows on what can only be described as macro-bearishness.  Regardless of what’s going on behind the scenes in the physical cotton world, speculators sold the market down to fresh lows.  Buying by trade to hedge fresh sales of physical bales was simply overwhelmed by speculative bearishness.  Buyers from Turkey to Southeast Asia stepped up to buy bales of US and other origins.  While volumes were reported as modest, it is at least a sign that prices are reaching a fundamental area of value.  To be clear, we saw no new news for the world of cotton that would justify today’s drop in price.

Today’s selling might have included some US producers still trying to fix price, but it was not driver of today’s move.  In fact, it is getting to that time of year when the natural sellers (those hedging US supply) begin to run low, while the mills still have millions more bales to fix for the current crop year.  As in recent years, the CFTC Cotton On-Call report is now showing a huge disparity to support the theory.

Today’s close on the ICE #2 closed on new lows as the US stock market was near its session lows.  As it turned out, cotton closed before the fireworks on Wall Street.  From down around 600 points, the Dow Jones Industrial Average rallied hard in the final hours to close with gains of around 260 points.  So, the US stock market has staged it’s biggest nominal one-day rally as well as the biggest recovery in the last two sessions.  For those bears that went home short of ICE #2 near today’s lows, tonight’s opening could prove a bit dicey.

Today’s  big drop in flat price was accompanied by additional stability in the nearby spreads.  The spreads are no where near their recent lows.  The CTH9-CTK9 is showing the fundamental strength observed anecdotally in the physical markets.

by Andy Ryan

andy.ryan@bnacommodities.com

Cotton futures opened slightly lower after the Christmas holiday, pushed to fresh lows, but closed materially higher.  While not a textbook reversal, cotton followed the US stock market and benchmark WTI Crude Oil higher after Monday’s nasty performance.  Not surprising, as cotton has traded closely with the broader markets during decline of recent weeks and months.  Fundamentally, we didn’t see a big change in anything within the cotton market which changed over the past 48 hours.  Politically, however, there was no additional negative news coming from the government or being tweeted by Trump.  The lack of aggressive tweeting about a government shut down was possibly all markets needed to catch their breath and bounce.  Whether or not it is just a dead cat remains to be seen.  Should the gov’t shutdown come to an end, bears across many markets could find themselves defensive.  Until then, its difficult for the trade dispute to capture center stage again.

Within the world of cotton, the fundamentals would seem supportive at the current low prices.  Let’s just start by looking at the nearby CTH9-CTK9 spread.  On Monday, when the prices were sharply lower, the spread actually moved sharply higher after a new low last Friday.  While spread-watching isn’t as popular as it once was, I still believe it is a good signpost for underlying fundamentals.  In this case, it is demand.  Over the previous weekend a Chinese gov’t entity was inquiring for good volumes of a non-US origin.  Additionally, Pakistani mill are now considering replacing local stocks with US bales, in the wake of the recent price decline on the ICE #2.  For those readers that don’t understand the importance of US prices at a discount to local Pakistani prices, I can only say that it doesn’t happen that often.  The last time it happened in a major way, it signaled an important low for cotton prices.  I believe the function of the market during the recent decline, politics aside, was to find a level of fundamental demand.

What little information can be found regarding progress on the trade dispute would seem to indicate things are moving forward.  The Chinese have agreed to execute any and all agreements and have already contracted some commodities they need dearly.   Further, stimulus packages for the Chinese economy have always been good for commodities, including cotton.  While I can’t declare a major low has been made, US cotton is now cheap on the world stage.

by Andy Ryan

andy.ryan@bnacommodities.com

 

Cotton prices remain enslaved by the constantly changing political landscape between the United States and the People’s Republic.  The markets remain uncertain keeping many speculators on the sidelines in risk off mode.  The arrest last week of Chinese telecom CFO Meng Wanzhou is the latest cold water thrown on warming Chinese and US trade dispute.  Cotton is no stranger to Chinese tariffs.  Traders have always dealt with import tariffs for all origins of cotton, only now there is are added tariffs for US bales.  As we all know, the Cotton #2 contract is a US contract and remains hyper focused on the US balance sheet, especially when stocks-to-use are historically on the lower side.  The uncertainty in the US balance sheet cannot be overstated when Chinese policy is in play.  In this case, the worlds largest exporter may find little demand from the largest importer, or quite possibly huge demand.

Tomorrow’s WASDE report will give no clues on Chinese trade policy, but will likely show only minor changes across both suppliers and consumers.  I could see the US supply moving lower, with the obligatory reduction in exports to leave the ending stocks close to unchanged.  Chinese consumption is also likely to move lower on a general slowdown of spinning.  Another small reduction in Turkish consumption would not be surprising as they continue to struggle to import lint with a much weaker lira.  Yarn stocks in and outside of China are widely thought to be on the side currently.  On the global production side, many are talking about more cotton in Brazil and less in India from last months estimates.

The technical pattern of relevance continues to be the sideways range trade.  Prices have been between 76.50 and 82.00 for roughly three months now.  Interesting that the benchmark 200-day moving average is also serving as resistance just above the market, currently at 81.74.  Many long-term trend following systems will use such a long-term average to guide their positions.

by Andy Ryan

andy.ryan@bnacommodities.com

 

The first part of the daily title was pulled directly from media headlines on both sides of the Pacific.  The second part, regarding cotton, was pulled right out of my head.  However, knowing what we thing we know about US cotton and Chinese S/D, we don’t thing our assumptions are irrational.  Chinese officials did much to reassure the world that President Trump’s rosy spin on the dinner in Argentina was, in fact, correct.  Liquid natural gas (LNG) and soybeans were mentioned specifically.  So, why not assume that a country that has a USDA-predicted shortfall of 15 million bales this year is gonna need some cotton from the worlds largest exporter (US).

So, how do we come to such an assumption if the same USDA says China had 38.02 mb to begin the marketing year?  For a couple years now, since the Reserve has been auctioned off, its widely know that a significant percentage of the existing reserves is extremely undesirable cotton.  It was procured expensively, sloppily and corruptly by the government.  Although some of it is usable, much of it does not meet the spinning needs of the modern Chinese mill.  They will auction Reserve stocks to support domestic production of 27.5 mb, but not likely more than 4-5 mb (1 m tonnes).  We shouldn’t forget what happened the last time the Chinese let their Reserves dwindle close to negligible.

The current USDA figure for Chinese imports is 7.0 mb.  It shouldn’t be enough is consumption is anywhere near the current number of 42.5 mb.  Yes, there is a small glut of yarn within China, but they will not shut down the mills given the fragile state of the general economy.  China is going to need more imports, and they will need it in chunks of 5k to 10k tons.  That means US cotton.

by Andy Ryan

andy.ryan@bnacommodities.com

 

Cotton futures gapped higher to begin the week, driven by positive developments between the US and China regarding the trade dispute.  Again, the US is the world’s largest exporter of cotton and China is the world’s largest importer.   The lead March19 contract pushed up against limit (+3.00) before softening.  Prices ended the session on the daily lows, but still with respectable gains.  The softer market late in the session came along side growing skepticism regarding the trade war advancements.  Initial optimism from both sides is already being watered down with the reality that no tariffs have yet been removed and nothing was signed.

I lean towards the optimistic side, hoping that both Trump and Xi have the fresh taste of economic dung in their mouths and will move forward with negotiations with a renewed sense of purpose.  While existing tariffs may be problematic for the few, a trade war is bad for all.  President Xi mentioned agricultural products being a big beneficiary of the purchases by China and that means soybeans and cotton.  The Chinese strategic cotton reserve is now down to modest levels and likely very low on higher grades of cotton.   China still needs to import bales to the mills of the East.  Cotton produced in Xinjiang eases out as a snails pace, while yarn production in the province continues to grow.  Although the US is low on high grades of cotton this year, it is still the only place the Chinese can source large volumes of lint consistently.

Within the cotton market, physical trade was reported quiet over the weekend, and rightly so as traders awaited any developments at the dinner in Buenos Aires.  I have heard that mill fixations were moved closer to the market after the higher open.  Likewise, its very likely that today’s rally was met with a host merchant selling as producers sold and fixed on-call sales.

Trading volume on the ICE #2 contract reached almost 46,000 contracts, a heavy day by most measures.  The heavy trading volume lends validity to the price gap left today, leading me to believe that it could be a “breakaway gap.”    These gaps come after significant basing patterns, not unlike the one seen since early October.

by Andy Ryan

BNA Commodities LLC

andy.ryan@bnacommodities.com

Cotton futures continued to trade indecisively in the lower reaches of the recent trading range.  The forthcoming WTO meeting is the first chance to see a public change of tone between the waring parties.  Trump could score a major victory if Xi would just give a little.  At any rate, cotton prices have discounted the trade war to date and all the demand implications between the worlds largest exporter and importer of cotton.  We saw markets of many types oscillate on potential WTO developments during todays US trading time.  When White House trade hawk Peter Navarro was announced as one of Trump’s dining companions with President Xi, the US stock market dipped to daily lows.  A late Wall Street Journal piece espousing a positive outcome between Trump and Xi boosted the market late.

Within the real world of cotton fundamentals, today saw another modest round of Weekly US export sales figures, keeping pace with the final WASDE figure of 15.0 million bales.  Despite the consistently poormouthing by merchants regarding demand, there is still meaningful business done every week by someone.  As usual, we guess much of the new business has been done on-call and has yet to produce a futures trade to fix price.  Below is the latest from the CFTC on unfixed on-call purchases and sales.  Despite the additional 6,281 unfixed producer positions (most likely rolls forward from December18) the unfixed current crop position is heavily skewed to the mill/consumer.  In fact, the skew is now 75,701 contracts (7.57 mb).  While this is normal for this time of the marketing year, so are seasonal lows and rising markets over the next few months.

We expect more intraday volatility tomorrow as expectations for progress at the WTO meeting will be all over the place tomorrow.   The daily chart for the CTH9 is looking more and more supportive in recent days, posting 3 straight reversal patterns off recent lows.  We would lean towards a pop higher on WTO optimism tomorrow.

Cotton futures were unable to build on yesterday’s rally off fresh lows.  More hard talk on trade from President Trump blew helped cotton back lower.  US stocks continue to trade defensive as the US dollar index pushed towards recent highs.  While cotton is only small collateral damage in the overall trade war, it remains hypersensitive to the situation.  Both President Trump and members of his cabinet spoke on the issue in the context of the upcoming G-20 meeting in Argentina.  Presidents Xi and Trump will meet over dinner on Saturday with the goal of hashing out the trade dispute.  Whitehouse economic advisor Kudlow was optimistic about a deal, insisting China’s weak economy versus the US’s strong economy will expedite China to the table.

The December18 ICE #2 Cotton saw another 400 contracts/40,000 bales issued by Term Commodities (LDC/Allenberg), which were stopped by SG Americas (Glencore).  That brings the total to 598 contract/59,800 bales over the first two days.  Remaining open interest for Dec19 was 1,069 contracts/106,900 bales.  Physical demand for US bales was reported as quiet by merchandisers, as was physical activity at the farm/gin level.  Trading on The Seam was a modest 4,121 bales.  Based on yesterday’s numbers, the US harvest is running behind pace by one to two weeks, with the weather affected heavyweights of Texas, Georgia and S. Carolina dragging the harvest out.

Although the USDA has already adjusted US production down 1.35 million bales in the wake of Hurricane Michael’s impact on Southeastern production it has yet the quantify losses in Texas from cold wet weather over the last month.  Of course, when talking across the trade one can get a range of estimates for the additional losses.  With the current WASDE production of 18.41 mb, many are comfortable with a December number somewhere at 18.0 mb or less.

The solid taker of the Dec18 contract and continued US export sales against current crop lead me to believe that demand is not quite as weak as those in the “trade” might bemoan.  Certainly there are inventory issues in the textile pipeline and questions at the consumer level, but there is still a lot of demand on US books against a shrinking crop.   System traders are said to be short cotton and much of the US crop has been priced to date.  If true, we see less risk to the downside than the upside at current prices.  Any relief in trade tensions between the world’s largest exporter and the world’s largest importer of cotton could have very drastic consequences for the US #2 Cotton contract.

On the daily chart, cotton never traded unchanged today, paring yesterday’s gains by roughly half.  Yesterday’s bullish-engulfing pattern on the candlesticks was the second consecutive reversal over the previous four sessions.  The market is trying to find support, but has yet to retest the early October low at 76.50