WASDE to play second fiddle to trade dispute…again.

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.

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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

 

Liquid natural gas and soybeans, cotton to follow.

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).

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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

 

Mind the Gap!

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.

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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

Struggling to keep its feet/WTO insanity

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.

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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.

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Cotton #2 Tumbles as Trump Tweets

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.

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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