New York cotton futures moved sideways last week, as December dropped 52 points to close at 63.04 cents/lb, while March gained 17 points to close at 61.88 cents/lb.
"The main feature this week was the drop in volatility, as the market is discounting a scenario in which prices are not expected to change significantly over the coming months”, the latest cotton market report from Plexus informs.
Both December and March volatility dropped around 2%, for at-the-money options this week, with out-of-the money strikes seeing even bigger declines.
This reveals that traders expect the market to remain ‘boxed in’ between relatively strong support and resistance. Such an outlook seems certainly plausible when looking at the current fundamental and technical picture.
From a fundamental point of view the market is still in the process of transitioning from an empty pipeline to one that may overflow in a few months’ time.
However, various government support programs, like the US loan or the Indian MSP, are likely to delay or mitigate the negative impact of these excess supplies.
Although China is expected to import only about half as many bales as last season, 7.0 million versus 14.1 million bales, because of fewer import quotas available, one cannot rule out that additional quantities will find their way into China, if an arbitrage opportunity between international and Chinese prices opens up.
The cheapest quotes in the A-index are currently at around 69.00 cents, which translates into roughly 15,000 Yuan/ton at the full 40% import tariff, for which no import quota is required.
That price compares to a current CC index of around 14,800 Yuan/ton and forward prices for January delivery of 13,900 Yuan/ton (CNCE) and 13,800 Yuan/ton (ZCE).
While international prices currently can’t compete against Chinese values, they are not too far out of line.
If international prices were to fall another 5 cents, say to 64 cents, it would equate to around 13,900 Yuan/ton and potentially allow for imports at the full tariff, provided of course that Chinese domestic prices maintain their current level.
Another numbers game exists in India, where the government agency - CCI has started to lift some cotton from farmers at the minimum support price (MSP), which calculates to around 67/68 cents ex-gin at the moment.
If the CCI were to take some 5 to 7 million bales off the market over the next few months, it would probably prevent any major price pressure during that time frame.
This may even open the door for imports from West Africa, since mills in the South of India may find it cheaper to import cotton than buying it from northern Indian markets.
Not too long ago, the market was of the opinion that prices would come under substantial pressure once the Northern Hemisphere crops are in, but due to these price support and arbitrage scenarios it now looks more like a slow grind.
