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Weekly: ICE Cotton Seen Moving Northwards Amid Lower Crop Projection, Strong Chart Structure

5 Jul 2020 5:13 pm
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Mumbai (Commodities Control) – Cotton #11 ended the holiday-shortened week on four months’ high. December futures on ICE ended 5.5% higher for the week ended 2nd July. Markets were closed on Friday, a day ahead of the U.S. Fourth of July holiday which falls on a Saturday.

ICE cotton futures edged higher, hitting a nearly four-month peak on Thursday as dry weather in top growing state Texas stoked crop damage concerns, although weak export sales data capped the natural fiber's gains.

The December contract settled up 19 points or 0.3%, at 62.95 cents per lb. Prices earlier rose to their highest since March 9 at 62.98 cents. October Cotton closed at 63.55 cents, up 47 points and March 21 Cotton closed at 63.67 cents, up 22 points. The December-March spread was 72 points.

The biggest push factor for the week, in case of cotton, was lower-than-expected planted acres of the natural fibre crop.

The United States Department of Agriculture's June acreage report showed an estimated planted area of 12.2 million acres for all cotton in 2020, compared with 13.2 million acres forecast.

In fact December futures managed to rise above the 60 cents mark after the U.S. Federal crop progress report.

On Wednesday, ICE cotton futures jumped 3% to their highest in nearly four months supported by lower acreage and dry weather concerns in the top growing-state Texas. This prompted investors to cover short positions.

“The weather in Texas continues to be hot and dry, which could lead to higher crop abandonment”, John Bondurant, a trader in Memphis, Tennessee said.

USDA’s Post reported Mexican new crop cotton planted area was down by 34% from 2019/20. The larger than expected cut came via a storm of market pressure, including reduced demand from COVID, lack of GM seeds, lack of pesticides, and dry harsh weather. Mexico planted 147,965 HA (366k acres) with a forecasted production of just 1.06m bales, the lowest since 2016/17.

Meanwhile the one limiting factor, during the week, for price gains in cotton was the weekly export sales data from the U.S. Department of Agriculture (USDA) that showed net sales of 67,300 running bales (RB) for 2019/20 were down 35% from the previous week.

Exports of 277,000 RB were down 12% from the previous week for the period ending June 25 and 19% below the same week last MY. China was the destination for 38% of the week’s shipments, MYTD China has been the destination for 15% of exports.

"While it (cotton) is still well below the 72 U.S. cents at which it began the year, it has gained considerable ground after having plunged to as low as 50 U.S. cents per pound at the start of the corona crisis," Commerzbank analysts said a note.

"On the other hand, the cotton price keeps being dampened by the uncertainty surrounding future demand trends, and above all surrounding the future of U.S.-Chinese (trade) relations," the note said.

The natural fiber has declined by about 11% so far this year after worldwide lockdowns to quell the spread of the novel coronavirus depleted demand.

"There are a lot of demand worries; the number of coronavirus cases are expanding in the U.S., throwing various states into doubt," said Jack Scoville, vice president at Chicago-based Price Futures Group.

On July 10, USDA will publish its latest supply-demand numbers. One great concern within the cotton industry is the very large projected carry outs. As of the last recording, U.S. stock was projected at 8.0 million bales, while world carry was pegged at 104.50 million bales. In addition, as long as the overshadowing COVID-19 persists, the demand world may be subject to more curtailment.

Meanwhile looking at the Indian side of cotton story; GoI has reported that as on 3rd July, there is a 100% rise in cotton planting to 91.7 lh with Maharashtra and Telangana planting cotton over 33 lh vs 4.6 lh and 15 lh vs 7.9 lh last year, respectively.

Domestic cotton prices managed to rise through greater part of the week on the back of light mill buying, reduced arrivals and robust cues from overseas cotton.

However, CCI is releasing its stock at discounted rates in the market which is weighing upon the local prices.

CCI currently has a stock of 12.9 million bales which it is forced to sell at a discounted rate. The Government agency has been auctioning its cotton at a discount ranging from Rs 300-1500/Candy.

It is to be noted that the Center set a cotton output target of 36 million bales this year. Although traders anticipate the output to touch 40 million bales due to higher acreage and normal monsoon forecast.

Even closing stock is expected to touch 11.5 million bales level due to reduced consumption. This takes the total supplies for the new season beginning October 2020 to around 50 million bales.

On the International front, Experts are of the opinion that speculators may boost prices even higher given the current momentum and money flows.

Michael Seery of Seery futures sees a higher price trend with a solid chart structure, coupled with increasing volatility in the future. Seery says that the fundamental and technical picture for cotton have turned to the upside coupled with the fact that demand is coming back from China.

Meanwhile Jack Scoville of The Price Futures Group is of the opinion that charts trends are all up for cotton. He sees a resistance at 63.70 cents, which if breached can take December cotton all the way up to 65 cents and above.

(Commodities Control Bureau)

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