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Weekly: For ICE raw cotton futures its weekly, monthly, quarterly loss; Consolidation may continue for some time

1 Oct 2022 6:04 pm
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Mumbai, 1 OCT (Commoditiescontrol): Cotton futures continue to suffer from selloff during the week ended Sep'20, as December contract ended 7.78% lower this week, not far from its July low. Recession fears continue to plague the market, with the dollar posting fresh 20-year highs before backing off later in the week.

However, ICE raw cotton futures eked out marginal gains on Friday, helped by late technical buying in natural fiber contracts. A strong U.S. dollar, a weaker Dow, plus a bearish exports hangover collectively pushed the market down earlier in the session.

ICE Cotton contract for December closed at 85.34 cents, up 0.18 cent, March 2023 finished at 83.45 cents, up 0.72 cent and July 2023 settled at 80.28 cents, 0.88 cent higher; estimated volume was 41,377 contracts.

As the market closed out Friday's trade, December cotton was down 7.20 cents for the week, 27.87 cents lower for the month and down 13.50 cents for the quarter.

October futures, with no limits during the delivery period, closed 611 points higher at 93.22 cents. Preliminary open interest (OI) was still just 14 contracts as of Sep 29’s settle. ICE had 9 deliveries against the October contract with Term Commodities the issuer and SG Americas the stopper. There have been 12 deliveries issued against Oct cotton.

Meanwhile, the second month contract has lost over 25% in September, its worst month since May 1986, which was its biggest fall ever since 1980. Export demand has been down, and is weighing on the market, along with recession concerns overall, analysts said. An economic downturn in major consumers of cotton would likely hurt demand for the natural fiber. Cotton prices have lost over 20% en route to a second straight quarterly fall.

The dollar firmed back towards recent highs on Friday, making U.S. cotton more expensive for overseas buyers.

Monday’s Crop Progress report indicated 67% of the country’s bolls were open by Sep 25, 5% ahead of average. Nationally the crop was 15% harvested, 1% faster than the average pace. As for conditions, NASS data converted to a 278 on the Brugler500 Index. That was down another 3 points from last week.

Next week's report will provide further update given that Hurricane Ian did not adversely impact the South Georgia crop, there should be big strides in the harvesting efforts.

Meantime, the Export Sales report showed another weak round of data for the week ending 9/22, with just 30,200 RB sold for 22/23 shipment and 41,500 RB for the next MY. Shipments dropped off from last week at 187,900 RB. The slow sales pace is not of huge concern given the large commitments already on the books. Shipped and unshipped sales combine for 68% of the current USDA forecast, 11% ahead of the 5-year average pace.

In USDA quarterly grains stocks data, for September, seemed to have little, if any, effect on cotton. Pakistan once again took most of it with 52,400 bales. There were just 9 markets with net increases in sales, while shipments of 188,900 RB went to 20 destinations.

Commitments for the current season are now at 8.35 million statistical bales, of which 1.9 million have so far been exported. This compares to 7.65 million in sales and 1.6 million shipped a year ago. While US commitments are currently at around 66% of estimated exports this season, there is a good chance that some of these sales will get cancelled in markets like China, Vietnam or Turkey.

US supply is currently projected at 17.6 million bales (beginning stocks + crop), of which 2.3 million are taken up by domestic mills and 1.9 million have already been exported. This still leaves 13.4 million bales that have yet to find their way to consuming markets, at a time when mills are burdened with inventories and are running at slower than usual rates. In other words, unless end-user demand improves, 13.4 million bales will be plenty!, analysts said.

Weather conditions appear normal this week. Hurricane 'Ian' is set to make landfall on the east coast of South Carolina, about Charleston. It could threaten the Carolina cotton crops with strong winds and heavy rains.

CFTC’s weekly CoT report showed cotton spec traders were 910 contracts less net long through the week that ended Sep 27. That left the group at an 8-wk low net long of 41,183 contracts. Commercial traders were adding more long hedges through the week than shorts, for a 6,272 contract weaker net short on 12,300 new contracts of OI. The commercial net short was 52,615,000 contracts as of Sep 27.

For the previous week, the CoT report provided an explanation for why open interest has been rising during this market decline. While spec longs liquidated, new trade longs more than made up for the difference.

Interesting focal point for the next week will be, how end-of-the-quarter selling affected those speculators trade.

Financial markets remain under pressure, with the Dow, S&P 500 and Nasdaq all breaking below their June lows this week, opening the door for an even deeper correction, while crude oil is down over 40 dollars from its high of four months ago.

With the Fed slamming on the monetary brakes, the economy is clearly slowing, while the US dollar has been surging to a 20-year high. The US is perceived as somewhat of a ‘safe haven’ in these turbulent times and it also pays higher interest rates than other major currencies, like the Euro or Yen.

The Cotlook A Index was 107.10 on Sep 29 after a 40 point boost. USDA’s FSA lowered the AWP for cotton by another 646 points to 82.42 cents. ICE certified stocks were up to 1,123 bales.

On technical front, the December contract is approaching key support at 82.54 cents, which is the mid-July low. If it holds, which is likely to be the case, it might get a decent bounce. However, upside potential seems limited due to fears of slow demand, a strong dollar and weak economic growth.

For Monday, support for December cotton is at 83.98 cents and 82.61 cents, with resistance at 86.33 cents and 87.31 cents.

Analysts believe that the WASDE report is still not reflecting the true supply/demand picture, because its global mill use number is significantly overstated. While the supply side is now more or less known. Analysts expect several downward revisions in mill use over the coming months, as the USDA will sooner or later have to reflect reality.

Cotton market would continue to transition into a sideways pattern of somewhere between 82 and 95 cents. For prices to move higher than that, there is need to see stronger demand.

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

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