NY cotton futures continue to slide this week

17 May '14

6 min read

A lot needs to go right for ROW production to reach nearly 86 million bales in the coming season, since there are at least three trouble spots that could easily trip this estimate up. While we feel that a US crop of 14.5 million bales is a good starting point, the exceptional drought in West Texas could drop this number below 14 million bales. There is still time for the situation to change for the better as there is finally some rain in the forecast for the next couple of weeks, but a thunderstorm or two won’t be enough to break the drought.

Another trouble spot is Australia, where the USDA expects a crop of 3.1 million in next season. Given the current water situation we feel that this number is at least 1.0 million bales too optimistic. However, like in the case of Texas there is still time to fill the reservoirs, although the odds are not great with an El Niño in the making.

Then there is India, where meteorologists are worried about a sub-par monsoon due to unfavorable wind patterns stemming from the onset of El Niño and volcanic debris from Mount Kelud in Indonesia. The USDA has the Indian crop at 36.5 million local bales next season or at more or less the same amount as this season, which too may prove to be on the high side.

US export sales for the week ending on May 8 were about as expected at 36’400 running bales net for May/July shipment and 12’600 running bales for August onwards. There were still no cancellations to speak of and shipments continued to surprise positively with another 228’400 running bales leaving the country. Total commitments are now at 10.2 million statistical bales, whereof 8.7 have already been exported. Given the current pace of shipments it is quite likely that we will reach the revised US export estimate of 10.4 million bales by the end of July.

So where do we go from here? The chart doesn’t look too healthy at the moment, as July is threatening to break below the 90 cents support area, which would likely trigger spec long liquidation and/or rolling of positions to December. However, there should be plenty of trade shorts waiting in the wings, ready to absorb anything the specs throw at them.

We may therefore see some choppy trading action in the days ahead. Since there are about twice as many trade shorts as there are spec longs, we expect the market to hold any selloff in the 87-89 cents range. The index fund roll, which will provide additional liquidity on the sell side, is still about three weeks away.

If July manages to hold support at 90 cents and rebounds, then the shorts have a problem and will probably start to chase values higher. The next few sessions should tell us which move is in play.

We still like December at 82 cents, although the prospect of rain in West Texas may lead to additional near term selling, but with an empty pipeline and a US crop that is getting planted late, we don’t want to be short December in the low 80s and prefer to place any bearish hedges in March instead.

Plexus Cotton Limited

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