Twenty-five sessions and counting! That's how long the March contract has been confined to this extremely narrow range of just 212 points, closing no lower than 77.23 cents and no higher than 79.35 cents since October 31st. We probably have to go back to the comatose trading range that existed between 2004 and 2007 to find an equally deadlocked period.
Speculators are often decried as the villains that cause erratic moves in commodity markets, but critics tend to forget that they also provide much needed liquidity and momentum. Speculators exist in a symbiotic relationship with the trade and when they are gone, we often end up with lackluster markets like the one we are currently dealing with.
Cotton is not the only commodity that has been abandoned, as hedge funds and other large speculators have greatly reduced their exposures in commodities across the board, with open interest in many instances amounting to less than half of what it used to be a year or two ago.
With supplies rising as a result of bountiful crops or increased mining output and demand slowing due to economic woes, trading opportunities have become harder to find, which is why a lot of these hedge funds have decided to employ their capital elsewhere, notably in the stock market.
The latest CFTC report showed a further reduction in overall open interest of 1'102 contracts, as all participants reduced their respective long and short exposure with the exception of outright spec longs, which increased their holdings by 2'661 lots. This is a welcome change after many weeks of liquidation and offers a glimmer of hope that the tide may finally be turning.
From a fundamental point of view there were also a few positive developments this week, as the certified stock dropped to just 96'521 bales this morning, after around 150'000 bales were taken down this week. Given the strong cash basis that is currently being paid, it is unlikely that the certified stock will grow again anytime soon. For that to happen the futures market needs to move to a more attractive price level!
The strong pace of US exports is another reason why prices may have to move to higher grounds, because the current level of sales is simply unsustainable! Over the last eight weeks US exports averaged around 300'000 bales a week and total commitments have now reached 6.9 million statistical bales.
If we add the 3.6 million bales that go to domestic mills, we arrive at 10.5 million statistical bales in total sales. With just about three million bales to go before the entire crop is committed, the US needs to start rationing its supply by pricing itself out of the market!
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It is rather amazing how the US has gone from 'residual supplier' to frontrunner in the export race in a matter of just two months, mainly thanks spec long liquidation that pushed values ten cents lower in October. While the US has over 75% of its crop committed, other origins are still lagging far behind with just around 25-40% of their respective crops sold. As a result we should either see US prices head higher, non-US prices come under pressure or a combination of the two.
Since late last week the Chinese Reserve has been acting as both a buyer and a seller in the domestic market, procuring cotton from producers at 20'400 Yuan/ton while at the same time offering stocks to mills at 18'000 Yuan/ton. On the procurement side the Reserve has bought nearly 3.4 million tons (15.5 million bales) so far, only slightly less than at the same time a year ago, and in a few weeks from now the government will be in control of nearly all remaining supplies in China. Sales auctions have been small by comparison, as less than 72'000 tons (328'000 bales) have so far been taken up by mills. Only about half of the auctioned quantity has been procured by mills, as they seem to be in no hurry to bid for Reserve cotton from the 2011/12-season and instead continue to focus on imports, which in the case of Indian cotton are still available at or below the Reserve price equivalent. Apparently there was a sizeable amount of Indian cotton sold to China last week. So where do we go from here? Sooner or later the market will make an attempt to break out of this straitjacket and the odds seem to favor a move to the upside. The downside seems to be fairly well contained as neither speculators nor the trade have an incentive to add to their net short position in New York considering a) how much US cotton has already been committed, b) that the certified stock is disappearing and cannot easily be replaced at current prices and c) Chinese buyers are ready to buy volume on dips. |