New York cotton futures dropped precipitously this week, as December lost 346 points to close at 59.73 cents/lb, while March fell 353 points to close at 58.75 cents/lb.
“The narrow five-week sideways trend ended abruptly on Monday after another failed attempt to take out the recent highs led to a reversal that pushed prices below key support at around 61 cents, triggering a wave of spec selling over the ensuing sessions,” the latest Plexus market report informs.
March had rallied all the way up to 63.70 cents on Monday morning on what appeared to be another round of spec short covering, but it started to run out of fuel going into the monthly USDA supply/demand report.
When the numbers failed to inspire additional buying, values started to cave in and March ended the session 238 points below its high. The fact that volume of nearly 78,000 contracts was the highest in four years, added validity to this reversal and set the stage for aggressive spec selling.
The USDA report contained basically no surprises, apart from Burma being added as a previously unrecognized cotton producer and consumer with 630,000 bales in production and 700,000 bales in mill use.
These additions helped to offset reductions of 500,000 bales in China’s production and mill use numbers. Other notable changes were production increases in the US with addition of 140,000 bales and West Africa with 150,000 bales, while that of Central Asia and Australia were lowered by 120,000 & 100,000 bales, respectively.
Global ending stocks are now predicted at a record 107.36 million bales, which are 5.63 million bales more than last season.
More importantly, ROW ending stocks are expected to increase from 38.8 million bales to 45.2 million bales, a jump of 6.4 million bales, as Chinese imports of 7.0 million bales won’t be enough to offset the ROW production surplus of 13.3 million bales.
“The only way to remedy this inventory overhang that now exists in China as well as the ROW is to discourage production and to stimulate consumption via lower prices,” the report states.
The most recent CFTC report as of November 4 showed the trade at 6.0 million bales net short, while Index funds were 5.9 million bales net long and speculators had just a very small 0.1 million bales net long.
However, as was pointed out last week, this basically flat net spec position is quite deceiving, because it is the result of relatively large blocks of spec longs of 6.7 million bales and spec shorts of 6.6 million bales, which have the potential to accelerate up or down moves.
The report is of the opinion that the volatile trading action witnessed over the last 10-12 sessions is directly linked to this interplay of spec short covering and spec long liquidation, with the latter having gained the upper hand when the market broke to the downside this week.
