December lost 131 points to close at 63.19 cents/lb, while March dropped 74 points to close at 62.28 cents/lb, which pulled down New York cotton futures this week.
“It was another uneventful week in the cotton market, as values continued to move within a very narrow trading range,” the latest Plexus market report informs.
Since October 6, the March contract, which as of today owns the highest open interest, has closed no lower than 61.71 cents and no higher than 63.27 cents, a range of just 156 points in 24 sessions.
December, the soon to expire spot month, has seen a little more movement with a 306-point range, but even that is nothing to get too excited about.
The market still appears to be boxed in between strong resistance stemming from a global oversupply scenario that is likely to persist for quite a while, while support comes mainly from government programs in the US and India that keep supply pressures in check.
Government support is changing the behaviour of market participants, as it keeps potential short sellers from getting too aggressive, while allowing growers to hold on to their cotton longer than they otherwise would.
The US marketing loan program pays growers 52 cents/lb for their cotton, which corresponds to over 80% of its current market value. The grower then has 9-10 months to redeem his cotton at the AWP, which is determined by the A-index.
In the current market environment a grower expects the AWP to move lower over the coming months, which would allow him to get his cotton back at a cheaper price.
Paradoxically, the more bearish producers are, the longer they may leave their cotton in the loan in anticipation of a falling AWP. This behaviour in turn restricts the supply coming into the marketplace, which counterbalances bearish forces.
The matter has been further complicated by lower payment limitations for growers this season, which makes it more difficult to trade cotton in equity form, for fear of owing the government some money back if marketing loan gains were to exceed payment limitations.
In a nutshell, it may be more difficult to get cotton out of grower hands than in previous seasons.
A similar situation exists in India, where the CCI has started to procure cotton at the MSP (Minimum Support Price) in several states, which has kept cash prices fairly stable just shy of 70 cents.
Even if the government ended up buying only 10% of the crop, which would equate to around 4 million local bales, it would probably be enough to keep Indian prices well supported.
The psychological effect of these programs can be quite potent, because the perception of a safety net will keep growers from panicking, while mills are more confident to buy near the MSP and traders are reluctant to undercut prices.
Statistically the ROW should see its stocks grow by around 7 million bales this season and since both the US and Indian governments are not going to hold on to stocks indefinitely, this extra supply will sooner or later filter into the marketplace.
