Futures market starts new calendar year on strong note
NY futures traded slightly lower since our last report on December 23, with March giving back 101 points to close at 72.89 cents.
Although the futures market started the new calendar year on a strong note by rallying to an intra-day high of 76.77 on Monday, it proved to be nothing more than a flash in the pan as values have since dropped by nearly 400 points. This correction seems to be the result of spec selling and index fund rebalancing, against which the trade has been a decent scale down buyer.
As expected we have seen the spread between the A-index and spot futures move back towards a more traditional difference recently. This morning the A-index measured 78.45 cents, while March closed at 72.89 cents, resulting in a spread of 556 points. Just a couple of months ago we had spot futures trading above the A-index, which is rather unusual and usually short-lived. Also, as of this morning we have once again a US quote (MOT at 79.25 cents) in the index after a five-month absence, which in our opinion is supportive because it signals that US cotton is competitive on the export front.
US exports were already quite strong before this week's price drop, as sales over the two-week holiday period amounted to no less than 583'200 running bales of Upland and Pima. Total commitments for the season now stand at 6.5 million statistical bales, whereof 3.6 million have so far been exported. Some analysts were disappointed about last week's export sales of 208'500 running bales, but we need to remember that if the US were to sell that amount every week, we would run out of cotton by the end of September.
We believe that the market does not yet fully appreciate how tight the US statistical situation is this season. We started last August with beginning stocks of around 6.3 million bales, to which we add the latest crop estimate of 12.6 million bales to arrive at total supply of 18.9 million bales. From that we need to subtract the 3.4 million that US domestic mill will have taken up by the end of July, which leaves 15.5 million bales available for export. Taking away the 6.5 million bales that have already been committed overseas leaves us with around 9 million bales that are still for sale. That may sound like a lot of cotton, but it really isn't! If we were to sell just 200'000 bales a week, it would take 45 weeks to completely sell out of everything and at 250'000 bales a week we would reach the end of the line in just 36 weeks, or by the first week of September.
Knowing that mills around the globe continue to be short-covered and that Chinese mills are now armed with import quotas of 8.7 million bales, we believe that US supplies will continue to dwindle rather quickly over the coming months. If we are correct with our assumption, it could have some interesting implications for the futures market. While merchants may see to it that carrying charges get rebuilt between March, May and July, current crop futures may eventually detach themselves from new crop since there will be very little cotton left for sale at the end of this season. We therefore would not be surprised to see a considerable inversion develop between July and December.