Weather remained the dominating feature in the cotton market this week, as storms continue to threaten open fields all over the globe. A couple of days ago untimely rains fell in Turkey and over the coming weekend two tropical systems are expected to bring heavy rainfall to cotton areas in the US and China.
Tropical storm “Karen” is on track to make landfall somewhere along the Alabama coast on Saturday, bringing gusty winds and possibly heavy downpours to the US Southeast, all the way from Alabama to North Carolina. Unfortunately the system seems to be a slow mover and may get mixed up with a cold front moving in from the Rockies, which has the potential to produce quite a bit of rain.
On the other side of the globe we have Typhoon “Fitow”, which is forecast to make landfall in China’s Zhejiang Province on Sunday, bringing potentially torrential rainfall to cotton areas in Jiangsu, Anhui, Henan and Shandong. Some models predict 4-8 inches of rain near the coast and 2-4 inches inland, which may impact both yield and quality.
While crops can handle an isolated rain event, the market is afraid that a recurring pattern of wet and cool conditions could make it difficult to get these already late Northern Hemisphere crops off the field and it may also reduce the availability of high grades. That’s why the market is currently pricing in a ‘weather premium’, which will likely be there for another four to six weeks.
Another interesting feature this week has been the big increase in open interest, as a total of 23’298 new longs and shorts were added over the last six sessions. Total open interest amounted to 205’751 contracts as of this morning, the highest level since the failed breakout attempt seven weeks ago, when it reached 214’378 contracts on August 19.
While new shorts are probably linked to hedge selling by the trade (Brazil, Australia, on-call sales), we have some difficulty explaining the sudden jump in new longs. We can’t see any compelling technical reasons that would have prompted spec longs to enter the market in big numbers.
Trade short covering doesn’t seem to be a likely cause either, since that would have led to a decline in open interest, although it is possible that some of these shorts bought bullish options strategies to safeguard their positions in view of all these weather worries.
In that case market makers, who are on the other side of the deal, would have had to buy futures to offset their risk. Since ICE only reports open interest in futures, we will have to wait for the next CFTC report to provide us with some clues as to who is behind all this new buying. Unfortunately the government shutdown will have us guessing for a while.
So where do we go from here? Although it may take some time until we get another USDA supply/demand report, indications are that global production won’t reach the September estimate of 117.42 million bales due to reductions in China, East Africa and Turkey, among others. China alone may have a million bales less than expected! We further have the potential for below average quality this season, especially if wet conditions were to continue.
With old crop supplies all but gone and with new crop still a big question mark, traders and mills have been in wait-and-see mode, which explains the rather dull trading conditions of late. Things are likely going to become a lot livelier once the crops are finally in.
We expect prices to remain well supported in the low 80s since the global production surplus is getting smaller, tenderable grades are less abundant than usual and Chinese imports of cotton and yarn keep inventories in the rest of the world at tight levels.
The market’s upside potential depends largely on what happens to crops over the coming weeks. If we don’t see any more setbacks, it will be difficult for prices to break out to the upside, but if adverse weather were to continue it could spark a powerful short-covering rally.
浙公网安33010602010414
