NY cotton futures show mixed reactions last week
New York cotton futures ended the previous week mixed, with December going up 45 points to close at 61.85 cents/lb, while March fell 51 points to 60.53 cents/lb.
While December managed to stand its ground this week, the deferred contracts came under additional pressure as the market continued to discount a long-term bearish scenario from which it may be difficult to escape for years to come.
“As a result, the Dec/March inversion expanded by nearly 100 points this week, with the spread closing today at 132 points,” the Plexus cotton market report informs.
Over the last five seasons, global output has exceeded mill use by 58.9 million bales and it was only thanks to China’s willingness to absorb the entire surplus that international cotton prices remained at elevated levels.
This has of course changed this season, since China is no longer willing to carry the load all by itself and is shifting some of the burden back to the ROW.
The market is still in the process of figuring out how much of an impact this will have on the ROW balance sheet, which depends mainly on factors like crop size as well as Chinese cotton and yarn imports.
The best guess at this point is that ROW stocks will grow by some 6-7 million bales over the course of the season to around 44-45 million bales, which would be slightly higher than the current USDA estimate of 43.4 million bales.
Although governments in the US and India, may temporarily assist in carrying the increasing stock burden, it will ultimately be the trade, that will have to hold the bulk of these inventories and in order to facilitate this task, one will eventually be able to see full carrying charges between the various futures months, starting with the March contract.
December will most likely continue to detach itself from the rest of the board since it follows different supply/demand fundamentals.
While there may be more than enough cotton available after the turn of the year, the pipeline is currently about as empty, as ever seen before and with the US crop being later than normal, it may take some time to restore supply flows.
Weather remains a concern in that regard, especially when it comes to West Texas. Most fields in the Lubbock area still need a few more weeks until they are finally ready for harvest and they therefore remain vulnerable to the cooler and wetter conditions that are forecast by the longer-range models.
The recent nosedive of the Arctic Oscillation index, which shows the most negative readings for October since 2002, is likely to send cold, Arctic air deep into the US over the coming weeks, while the storm track also remains farther south.
What worries not so much the size of the crop, but quality and fiber characteristics, since growing conditions have been challenging this season. Merchants are taking a chance by continuing to push sales of US cotton without knowing the quality composition of the crop yet and this could backfire if the weather doesn’t cooperate over the next 4-6 weeks.