It was a very interesting and confusing week to say the least, with the market sending us a lot of mixed signals. When we simply look at NYBOT futures, one has to get rather depressed by this latest collapse in prices. Unable to find any support, futures prices have clearly broken down on a deteriorating technical picture with all active months from May to December posting new contract lows this week.
The latest spec/hedge report gave us an indication that it was mostly new spec shorts that pressured the market, as they increased their positions by 11'702 contracts last week, while trade shorts actually covered 12'495 contracts. On the long side there was not much of a change, as spec longs added just 524 contracts, while trade longs liquidated 1'317 contracts.
Overall, specs were basically square at 0.2 percent net long, as they were holding around 10.8 mio bales on both sides. The trade on the other hand carried about 12.1 mio bales in longs and shorts, although on the long side almost 10 million bales belong to index funds.
Contrary to the futures market, the A-index actually ended the week with a 5-point gain, as it calculated still at 59.00 cents this morning. When we examine how the individual components of the index changed during the course of the week, we had Central Asian up 25 points, African down 25 points, Memphis/Eastern down 75 points and Indian up 75 points.
Paraguayan, which was still among the five cheapest last Thursday, was also up 75 points but got pushed out of the index by California/Arizona, which dropped 100 points. If we break the index down into foreign and US quotes, we have the four foreign quotes that were part of the index last Thursday up by an average of 37.5 points, while the two US quotes dropped by an average of 87.5 points. What this is telling us is that foreign prices refuse to go down despite the weakness in New York, while US quotes are still following the futures market down to some degree. But does US cotton really have to get cheaper?
Not if the latest US export sales report is any guidance! For the week ending April 12, export sales reached a marketing-year high of 796'300 running bales of Upland and 38'200 running bales of Pima cotton. The only blemish in this report was the still lackluster shipment number of just 273'000 running bales.
For the season, total commitments now amount to 11.34 statistical bales, whereof 6.7 mio bales have so far been exported. In order to reach the current USDA export projection of 13.5 mio statistical bales, shipments need to average about 415'000 running bales from here on out.
Over the last four weeks, the US has sold almost 2 million bales for export, with 25 markets participating in the buying, and with China booking around 1.1 mio bales. Furthermore, almost all of these sales were for shipment between April and July, with not much being sold for August onward at this juncture. Since China and most other markets are still wide open between August and October, it is almost a given that we shall see a decent amount of demand for US cotton all the way to new crop.
Why is the futures market behaving so poorly with all this encouraging news on the export front? We believe that it was caused by a combination of two factors. The first one was the deteriorating technical picture, which attracted new spec shorts once important support levels were broken.
The second one was of fundamental nature, as the huge certificated stock of currently around 700'000 bales needed to find a level at which it would more or less be at par with cash cotton. In other words, cotton in the certificated stock cannot be more valuable than cotton in the cash market, since otherwise no one is willing to carry this huge block of inventory.
However, with May at around 49.00 cents, we believe that the certificated stock is now cheap enough to find a taker, unless the AWP unexpectedly starts to decline again, which would open the door for prices to erode further. But since we are now officially in the AWP blending period, there will sooner or later be an upward adjustment to forward quotes, which should lift the AWP in relation to spot futures.
Even though speculators have the power to push the market even lower in the interim, prices will ultimately have to reflect what makes sense from a fundamental point of view. Since March 29th, the May contract has dropped by over 500 points, while the AWP has given up just 113 points during the same time frame. What we need to remember is that US prices start their price calculation with the AWP, because that's the level at which the 10.2 mio bales that remain in the loan can be redeemed from the government. Therefore, unless we see the AWP drop from here, the shorts may find themselves in a predicament if they keep pressing the downside.
