The market is in search of a solid bid, but with fundamentals and technical indicators both in bearish mode, the path of least resistance continues to be down for now. July has so far given up over 900 points since closing at 94.75 cents exactly a month ago, while December is more than 700 points below its high of 84.53 cents.
The liquidation of the July contract has continued in very orderly fashion, with the CFTC showing the trade just 3.7 million bales net short as of May 20 (Futures and Options combined), which is down 2.9 million bales from three weeks earlier. By contrast, a year ago the trade still carried an 8.4 million bales net short in July. We believe that the steep inversion to new crop has sped up the liquidation of any remaining basis-long positions in current crop, as forward prices offer no incentive to hold on to cotton and rolling a hedge to December is therefore of no value.
In other words, we have a situation in which merchants are eager to clean out their inventory and mills are equally inclined to fill their open slots for nearby shipment. This has led to some brisk business over the last couple of weeks, as sizeable quantities of Australian and US cotton have changed hands.
US export sales of Upland and Pima cotton amounted to 311’900 running bales for the week ending on May 29, with 20 markets participating. 134’600 running bales were for June/July shipment, whereas 177’300 running bales were for August onwards. Shipments of 179’600 running bales were below those of recent weeks, but still quite a bit above the pace needed to make the current USDA estimate of 10.4 million statistical bales.
Total commitments for the season now amount to 10.8 million statistical bales, whereof 9.3 million bales have so far been exported. New crop commitments have risen to 2.2 million statistical bales, of which we estimate that a little over half, or around 1.2 million bales, will be shipped from existing inventories. If this assumption were correct, then the remaining amount of unsold US cotton would amount to no more than 300’000 bales. For the reasons stated above, we may see just about every last bale of US cotton sold and shipped by the end of summer, leaving the US pipeline more or less empty by the time new crop arrives. We can’t remember a time when US supplies were tighter than they currently are!
With that in mind, the market needs to temper its expectations in regards to US export sales for the remainder of the marketing year. Since there is hardly anything left for sale, additional commitments won’t amount to much! Even new crop sales will probably slow down, since mills are not covering that far forward these days and with a US crop to that is showing a lot of promise, no one seems to be in a hurry to cover.