Which way now for cotton futures?
After trading sideways, with a slightly upward bias, for
more than a week, New York's December contract found more definite direction,
downwards, in the last session, closing 1.4% lower at 68.25 cents a pound.
"Finally, we have seen some real movement in cotton futures,"
said trading house Ecom.
Has this set the direction to come?
'Really doesn't care'
Ecom was not too reassuring for bulls, saying that "the
futures market is showing us that is really doesn't care about the hurricanes,"
ie Harvey and Irma, which swept through parts of the US cotton belt, "and
expect that the damage will be minimal to the size of the crop".
Nor was Tobin Gorey at Commonwealth Bank of Australia who, terming
the last session's price fall as "certainly a jolt for the market", added that "this
might be the market returning to normality" which could mean harvest pressure
"The market will seasonally feel the weight of US supply as
a still-large crop comes to market."
While there are estimates that the US may have lost well
over 1m bales of cotton to the hurricanes, this is in the context of a harvest
that the US Department of Agriculture had pegged at 21.8m bales, a rise of 4.6m
bales year on year.
'Real trouble on
One hope for bulls is that at least the downside could be
minimal, with Mr Gorey noting that "December cotton futures seemed to find
support just below 67 cents a pound prior to the hurricanes".
But it is by no means certain that this floor will hold
again, given the large net long, of more than 70,000 contracts, that hedge funds have built in cotton futures
and options – which looks precarious if an upswing in values is not
"I would expect the speculators who added longs above the
72-cents-a-pound level would be starting to get concerned as the market drops
away, and doesn't look to be returning to those levels without a catastrophic
event happen, "Ecom said.
"If we can make it until cotton gets in the bale without any
major hiccups then the specs will have some real trouble on their hands and
they will have a tough time getting out of their longs without much pain."
So as to what the downside could be, Ron Lee at McCleskey
Cotton said that "history tells us that a 6.0m-bale carryout," as the USDA is
currently forecasting, "equals a price that begins with a 5".
However, that would not factor in any hurricane losses, nor "uncertainty"
that Mr Lee also flagged.
"It's around every corner," he said, sticking by a forecast
that New York futures will actually stay in the 66-76 cents-a-pound range.
"What if the Chinese decided the time was right to restock
'Rumours have merit'
That is not as outlandish a suggestion as it first appears,
given that China has seemed focused on getting shot of its huge state
inventories, built up thanks to a (now-scrapped) guaranteed pricing scheme.
Those auctions have gone far better than most investors had
Louis Rose at Rose Commodity Group noted that "in China,
rumours and conjecture continue to swirl regarding potential reserve purchases,
both domestic and via imports, over the coming months.
"We think that these rumours have merit. Current data
suggest that such is more than plausible.
"The reserve has sold nearly 14m bales of its reserve
stockpile since March."