NY futures jumped this week, as July rallied 474 points to close at 84.87 cents, while December gained 256 points to close at 85.39 cents.
After nine consecutive losing sessions at the end of May, during which the spot month lost more than 700 points, the market came back with a vengeance this week, with July reclaiming over 500 points since Monday. The market had simply gotten too cheap after widespread spec liquidation forced values temporarily below 80 cents last week, creating a big opportunity for cash buyers.
The US export sales report confirmed that this unexpected price drop facilitated a lot of business last week. Net new sales for both marketing years amounted to 323’600 running bales, with China taking once again the lion’s share with 134’700 running bales, followed by 13 other markets.
Shipments were excellent as well at 307’100 running bales, leaving just a little over two million bales to be shipped. Total commitments for the current season are now at 13.6 million statistical bales, of which 11.6 million bales have already been exported.
The US statistical situation is getting rather tight after this latest round of sales. We started this season with total supply of 20.7 million statistical bales, of which 13.6 million bales have so far been committed for export and 3.4 million bales go to domestic mills.
This leaves theoretically 3.7 million bales for sale, but we have to reserve at least 0.9 million bales for domestic mill use between August and October and we further estimate that around 1.3 million of the 2.0 million bales in new crop export commitments will be shipped from current supplies. In other words, after subtracting these future commitments, there may only be 1.5 million bales of US cotton still available, and this number includes the certified stock of 0.5 million bales. A few more weeks of decent export sales and buyers will be scraping the barrel!
While China has been actively buying the recent dips in the market, many mills around the globe seem to be a bit too nonchalant in covering their remaining needs for the second and third quarter, believing that there will be plenty of supplies to choose from once they finally make up their mind. We are afraid that this may not be the case and that this casual attitude may come back to haunt a lot of these buyers.
We can hardly remember a time when available supplies outside of China were as tight as now. The US is down to the last 1.5 million bales, Australia may have just 1.0 million left and most other origins (India, Brazil, Africa) don’t have vast amounts to offer either. Central Asia still has a fair amount of cotton, but political and logistical constraints are preventing it from coming to the market in any significant volume. We would therefore advise mills to cover their July to October shipments with a sense of urgency, before certain qualities become scarce or prices run away to the upside.
In this regard it is no surprise that July has once again been gaining ground on December, with the carry shrinking from nearly 300 to just 50 points this week. July is now drumming to its own beat, supported by rapidly depleting stocks, while December is kept in check by the promise of a new crop and the threat of a policy shift in China next season.
Sure, there is the certified stock of currently 536’000 bales (including bales under review), which under normal circumstances should be forcing carry into the market. But we need to remember that the certified stock forms part of the paltry 1.5 million bales of US cotton that remain for sale, which are not expected to last for more than a couple of months. In other words, the market doesn’t really need carry if there is nothing left to carry!
Last night West Texas finally received some much-needed rain, with most stations around Lubbock receiving between 0.5 and 2.0 inches. This brings a lot of the already written off dryland acreage back into play, although one rain event is not going to make a crop yet. While the topsoil may have gotten wet enough for seed to sprout, the roots won’t find much subsoil moisture to dig in and are therefore vulnerable to hot and dry conditions during summer, unless more rain follows soon.
So where do we go from here? July shorts had a chance to get out at 80 cents and mills got an opportunity to cover summer shipments, but only a small number of traders seem to have taken advantage of the recent price break. There were still nearly 90’000 contracts open in July this morning, although the Goldman roll will bring this number down considerably over the next five sessions.
Anyone still short July beyond next week is asking for trouble in our opinion, unless they own certified stock to back up their bets. We have a feeling that the market won’t be kind to procrastinators this time around and that we could see some last minute fireworks in July!
December may be a different story, as growers are likely to engage in a lot of hedging between 85 and 90 cents, which should keep a lid on new crop in the foreseeable future. However, if China continues to tighten the balance sheet in the rest of the world, new crop prices may eventually have to ration demand by moving higher.
