The market is a bit of an enigma at the moment, because there seems to be a disconnect between perception and reality. Although most analysts and commentators still have a rather negative outlook on cotton prices based on a statistical picture that sees global ending stocks rise to a massive 79 million bales, the market is acting remarkably resilient.
What caught our attention in this regard was the latest CFTC spec/hedge report, which showed continued strong trade buying and short covering in the week that ended on October 2nd. The trade bought nearly 15’000 contracts net futures and options during that week, while large and small speculators took the other side.
If we combine that with the 10’998 lots that the trade bought the week before, it amounts to nearly 2.6 million bales in net purchases. Why was the trade such a strong buyer of futures and options into this price decline, at a time when we typically see a lot of hedge selling as crops are coming in? Some feel that quality concerns prompted traders to cover shorts in the futures market, while others suspect that a large sale to China might be the reason behind it.
Looking at the latest USDA classing data, there is definitely some cause for concern, since the first 1.63 million bales of new crop yielded just 46.5 percent in tenderable grades. There seems to be an unusually high percentage of high micronaire cotton all the way from South Texas to the Southeast, with classing offices from Corpus Christi, TX to Florence, SC reporting micronaire averages between 4.8 and 5.0. This means that out of 728’000 bales classed in Corpus Christi just 49.6 percent are tenderable, while the first 334’000 bales classed in Memphis yielded only 38.7 percent.
West Texas seems to be a different story, based on the small amount of 6’000 bales that has been classed in Lubbock so far. While the micronaire is mostly in the tenderable range with a 4.1 average, the problem there is staple, as 44.7 percent is shorter than 1.1/32. Although it is still early with only about 10 percent of the US Upland crop classed so far, it looks like the extreme heat and drought this summer have taken a toll on fiber characteristics. We believe that this low percentage of tenderable grades has traders nervous, which may be at least part of the reason for all this trade short covering we have seen in recent weeks.
This morning the USDA released its latest supply/demand estimate and it wasn’t pretty! Global stocks are now expected to rise to 79.1 million bales at the end of this season, which would be 9.5 million bales more than last season, 30.5 million more than in 2010/11 and 32.3 million bales more than in 2009/10. The only thing that keeps these stocks from pressuring prices more than they already have is the fact that most of this stock accumulation is happening in China. Of the 32.3 million bales in added stocks over the last three seasons, 26.0 million bales belong to China and just 6.3 million bales to the rest of the world.
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