Will cotton become
That is, did the 7.4% surge in July cotton futures in the
last two sessions set the market up for a mighty reversal?
And it could be mighty indeed, given that the fibre's
limit-up close to the last session has led to an expansion of limits for this
one, to 5 cents a pound.
Louis Rose at Rose Commodity Group noted that "on occasions when
the market moves southward" the session after a limit-up close, "moves have
often tended to be brisk and severe".
'Market is on fire'
Still, such retreats do represent a minority.
In fact, "most often, since 2002, there has been an upward
bias to positive daily settlement changes for days following a limit up
settlement," Mr Rose said.
"The statistical analysis suggests a higher settlement for
the July contract on Monday."
And the contract certainly started with that intent, standing
4.2% higher at 85.65 cents a pound as of 09:45 UK time (03:45 Chicago time).
Earlier, the lot touched 85.74 cents a pound, up 12.1% in
three sessions, and the highest price for a spot contract since June 2014.
"The cotton market is on fire," said Joe Lardy at broker CHS
'Very tight supply'
As for the rationale behind the surge, fingers are pointing
in the main at strong US export data, and what this means to supplies already
looking squeezed – at least until the next harvest, which is expected to be a
"The US has already exported a lot of cotton," said Tobin
Gorey at Commonwealth Bank of Australia.
"Supply consequently will be very tight until new northern
hemisphere crops come to market later this year."
'Huge margin calls'
However, technical factors look like playing a part too,
with CHS Hedging's Joe Lardy saying that last week, "the 10, 20, and 50 day
moving averages converged and the speculative funds went hunting buy stops.
With in the last session "the shorts trapped and unable to trade and now facing
some huge margin calls, Monday should be a volatile day as well".
The number of gross shorts in New York cotton futures and
options, at 10,550 lots, actually rose 694 lots in the week to last Tuesday, although
that data includes too more distant contracts, which have underperformed the
spot on ideas of larger supplies ahead.
The December lot was higher in early deals, but by a more
modest 0.9% to 74.41 cents a pound,
taking its three-session gains to 2.6%.
Again, movement in cotton was more than that found in many other
But the idea of broad market calm did take a knock with a joint
statement by the energy ministers of Saudi Arabia and Russia, in which they
said output cuts by major oil producers should be extended until March 2018.
The impact was to send Brent
crude up to $52.13 a barrel at one point, before it eased back to $51.95 a
barrel, a gain of 2.2% on the day.
Will this provide support too for ags used in making
Ethanol vs sugar
Certainly, the news came at a timely moment for sugar futures, which have faced selling
in part on ideas of a drop in Brazilian ethanol prices, which would mean sugar
having to compete less hard (in terms of price elevation) to gain its allotment
"There is some discussion that Petrobras, the Brazilian
energy giant, might be able to cut gasoline prices again," CBA's Tobin Gorey
"That would pull down ethanol prices further and so the
point at which Brazil's mills will produce ethanol instead of sugar."
Raw sugar futures for July traded 0.6% higher at 15.60 cents
a pound in New York.
'Showers will slow planting'
However, in Chicago, corn,
the grain most associated with ethanol manufacture, eased back 0.2% to $3.70 ¼ a
bushel for July, after a largely dry weekend in the US Midwest, which likely
allowed substantial spring sowings progress.
(More on this will come later, with the US Department of
Agriculture's weekly crop progress report.)
That said, losses were limited by the prospect of further
Midwest rains ahead, although centring on the north western and central areas which
have largely been able to get ahead with seedings.
It is the southern and eastern areas which have proved the
biggest worry of late.
This week, "widespread showers in northwest and central area
will slow corn/soybean planting", said MDA.
Rival weather service Commodity Weather Group said that
eastern Midwest seeding "should advance this week, given a dry window of 7-8
days in much of the area".
'Potential for short
It should be pointed out that if the weather does not
oblige, there is the potential for large upward pressure on prices, given the extent
of short positions put into corn by hedge funds (positions which would likely
be closed to a great degree should corn production prospects suffer).
Hedge funds raised their net short in corn futures and
options by 24,000 lots week on week to more than 208,000 contracts, the second
biggest on data going back to 2006.
"The potential for short covering does exist with a new
bullish market catalyst," said Benson Quinn Commodities.
"It would be rare not to have a weather market at some point
during the summer."
By contrast, in Chicago wheat,
hedge funds cut their net short by more than had been expected, some 16,000
lots to just under 108,000 contracts.
That was seen as a potential negative for prices, in showing
less unfulfilled buying pressure (which is what short bets essentially are)
than had been thought.
Benson Quinn Commodities forecast that the data would "offer
resistance in the winter wheat markets", likely bringing a "weaker tone" to
And Chicago wheat for July indeed dropped 1.1% to $4.28 a
'Wetness and disease
Not that all factors in wheat markets were negative for
prices, with the US Plains rains seen as raising the threat of wheat damage
"Showers this week will increase wetness and disease threats,"
They will also renew setbacks to spring wheat sowings, into Canada,
and indeed, Minneapolis spring wheat for July eased a less marked 0.2% to $5.45
¼ a bushel.
But rains in parts of the European Union are viewed as
positive for output prospects in the world's top wheat grower, where dryness
has been an issue (including in the western UK, where Agrimoney.com is based,
but where rains of more than an inch in the past few days are viewed as having
bad a big positive impact on crop potential).
In Europe, "rains continue to improve moisture for most
wheat/corn areas over the next 10 days," Commodity Weather Group said.
meanwhile, edged 0.2% higher to $9.65 a bushel for July, finding support from
firm vegetable oil markets, with soyoil
up 0.6% at 33.05 cents a pound for July.
That in turn reflected strength in palm oil futures, which added 0.8% to 2,671 ringgit a tonne in
Kuala Lumpur, after Intertek said Malaysian exports of the vegetable oil were
up 8.9% so far this month.
Rival cargo surveyor SGS put the increase at 7.1%.
"The fasting month of Ramadan, which begins at the end of
May this year and sees Muslims break day-long fasts with communal feasting,
historically leads to higher usage of palm oil for cooking in regions such as
India and the Middle East," Oriental Pacific Futures noted.