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Weekly: ICE Cotton futures extend weekly fall on demand concern, strong dollar; Sideways movement likely next week

24 Sep 2022 3:23 pm
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Mumbai, 24 Sep (Commoditiescontrol): ICE Cotton futures prices dropped again this week to the lowest price in a month and a half, and most traded contracts settled limit down on Friday, due to the persistent worries over demand and an elevated dollar, with a downbeat broader market sentiment piling on more pressure.

ICE Cotton contracts for December closed at 92.54 cents, down 4.00 cent; March 23 finished at 89.67 cents, down 4.00 cent, and July 23 settled at 84.78 cents, 4.00 cent lower. Friday's estimated volume was 21,923 contracts.

December Cotton ended 675 points or 6.8% lower for the week, over 2,067 points for the month, and for the first, it was down 11 points on the year.

Broader market fall reflects poor psychology of the U.S. and global economy, while a stout dollar potentially undercuts future U.S. agricultural export prospects. Meltdown in global risky asset value, bonds and bitcoin, decline in real estate suggests consumers don’t feel their best right now, which is reflected by record low consumer confidence indexes, both in the US and Europe.

Adding insult to injury, the Fed raised interest rates by another 75 points yesterday, to a target range of 3.0 to 3.25%. The statement of the Fed was much more hawkish than what the market had hoped for, as Chairman Powell stated that further rate increases were appropriate until inflation gets down to 2%. This means that an already struggling economy will probably slow down a lot more, which doesn’t bode well for consumption.

High rates bodes well for the U.S. dollar. It ran to new highs, buoyed by the hawkish attitude of the Federal Reserve. The dollar hovered near fresh two-decade peaks, making U.S. cotton more expensive for buyers holding other currencies.

We have absorbed lower than expected U.S. export sales data too. Pressure hovered over the cotton complex all week with recession fears and the dollar posting fresh 20-year highs at the end of the week. The cotton market was lower Friday as USDA's weekly export sales data reported total sales of 33,000 for this year, and 13,000 for new crop, with Pakistan accounting for 36,600 RB. Shipments were still fairly decent at 232,300 RB, considering that we are in-between crops and that supplies are currently running low.

Further, Monday’s Crop Progress report indicated 59% of the country’s bolls were open by September 18, 8% ahead of average. Nationally the crop was 11% harvested, matching the average pace.

As for conditions, NASS data converted to a 281 on the Brugler500 Index. That was down another 4 points from last week.

Total commitments for the current marketing year are at 8.3 million statistical bales, of which 1.7 million have so far been exported. This compares to 7.05 million in sales and 1.45 million shipped a year ago. However, we hear of potential cancellations or buybacks in some markets, especially where shipments are several months past their due date.

CFTC’s weekly Commitment of Traders update had cotton specs at 42,093 contracts net long on September 20. That was down 6,040 contracts through the week, driven by long liquidation. Commercials were buying long cotton hedges at the same time, resulting in a 7,338 contract weaker net short of 58,887 contracts – their lowest net short since August and 2nd lowest since June of 2020.

Interestingly, futures open interest has gone up about 5,000 to 214,000 contracts over the last five sessions, which suggests that there hasn’t been much additional liquidation, or that traders who got out were replaced by others getting in at lower levels.

The CFTC on-call report showed very little progress in terms of mill fixations, as unfixed on-call sales from December to July were down just 0.2 million to 9.10 million bales as of last Friday. There were still 5.28 million bales unfixed on December alone, with about two months to go until the Dec notice period. The fact that mills are in no hurry to fix reflects the dismal state of their business in our opinion.

Meanwhile, China has built a massive COVID-19 isolation center made up of hundreds of temporary buildings. It's part of a broad plan to provide 100,000 isolation beds across three sites. That's negative for cotton consumption.

Some interesting climate notes show that Russia and Ukraine weather will continue to improve for planting, good for emerging and establishing winter crops, while China's Yangtze River Basin will continue to see very little rainfall for the next two weeks. Central and eastern India will receive widespread rain over the next ten days, but Pakistan will remain dry. Eastern Australia is expected to stay wet into early next week with Western Australia seeing scanty rainfall.

NOAA’s updated 7-day QPF shows rainfall from Fiona hitting mainland Florida, followed by rains from the as yet unnamed storm currently tagged TD (Tropical Depression) 9. Most of cotton country will stay drier with less than 1/2” accumulated. Texas and Louisiana will stay dry.

USDA’s weekly Cotton Market review showed 3,621 bales were sold at spot through the week that ended September 22 – with an average price of 97.46 cents.

The Cotlook A Index was back up by 340 points to 115.35 cents/lb. USDA dropped the AWP for cotton by 629 points to 88.88 cents/lb.

Weather premium built in price due to Hurricane Gaston in the Gulf of Mexico next week, may get evaporated quickly, if it turns out to be another dud.

To conclude, demand revival holds the key. If there is no improvement in demand, there is not much upside potential. But, one needs to be cautious as cotton's price differential with other cash crop narrowing, it will make the natural fibre to defend its acreage next season. Higher input costs are another reason not to get too negative on cotton prices, especially with Dec’23 already at 80 cents.

Hence, it is likely that the market will move sideways in a 10-15 cents range in the foreseeable future, similar to the level before August WASDE.

For Monday, support for December cotton is at 91.22 cents and 89.90 cents, with resistance at 95.18 cents and 97.82 cents.

(By Commoditiescontrol Bureau: +91-22-40015505)

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