Johnson On Cotton: The Surprise May Be On The Upside

    A month ago, a bearish January 10 USDA supply-and-demand report resulted in a lower close that same day but the following business day and beyond, futures rallied as other factors beyond the monthly update were driving prices.

    The same is occurring this month with disappointment over the USDA lack of change with the US balance sheet, leading to a rejection of new highs on Monday, February 10.

    The following two days saw futures ignore Monday’s trade by moving to new highs. In the case of May, the lead month due to liquidation in the March, advanced to 89.67, its highest level since Apr 2012.

    Outright buying by specs, mill fixations and rolling by specs and commercials out of the March were all supportive factors. However, as mentioned more than once the past two weeks, futures and the old crop spreads have behaved in a manner suggesting something else is afoot.

    I suspect a sizeable commercial was trapped in the March and was going to great pains to exit the position. In addition, there may also be merchant or fund attempting to get long for the upcoming delivery period, distorting price patterns.

    With the major index funds having completed their roll, a more orderly trade is likely over the next 5 business sessions prior to FND. The Mar/May and May/July spreads should move closer to full carry reflecting the larger deliverable supplies.

    As to flat price, support in the form of mill buying and efforts to ration demand will prevent a sizeable drop but pushing through 90 cents basis May will take more energy and interest than we have seen thus far. Old crop futures have exceeded just about everyone’s upside targets in recent days and weeks having broken through various resistance levels begging the question what is next.

    A year ago, the seasonal high occurred on March 15, 2013, with the Mar 13 contract trading (during its notice period) up to 94.00 whereas the May 2013, high was 93.93.

    With this year’s world ending stocks (due to China) at all-time record highs and the uncertainty with China’s policy into 2014, how could prices trade as high as they have? The USDA has projected world trade (imports/exports) at 38.5 mln bales, 7.8 mln below a year ago.

    A sizable drop in Chinese imports of 9.3 mln is behind the decline but increased buying from other Asian countries as well as the traditional buyers, such as Turkey and Mexico, has narrowed the gap.

    As a reminder, Rest-of-the-World ending stocks is 39.2 mln versus a year-ago of 38.8 mln, not much of an increase. Based on feedback from commercial sources, the gap could narrow further if there are sufficient, additional exportable supplies.

    And that may be where the problem lies: the two largest suppliers, the US and India, have sold much of their available cotton and in the case of India, shipped a great deal, as well. Australian and Brazilian supplies will not be available until late spring if not this summer, leaving few other choices.

    Since the market moves in a manner that surprises if not hurts the largest number of trades, the surprise has been and is likely to continue to be the upside. The negative view of prices that were prevalent last fall and into this winter has lulled many mills into a sense of complacently that has only of late become problematic.

    The negative outlook could be due to a misplaced belief that China cannot maintain its course and radical action is likely. I discussed at length in my AFB PPT the error being made by traders outside of China that any changes will be quick and therefore bearish for prices over time.

    I disagree with that outlook. But irrespective of what happens with 2014/15, for the next 3-4 months the market has to contend with better import demand but reduced available supplies in the Rest-of-the-World category.

    As for the next day or so, my technician says: “A slightly lower close in March or May cotton will set up a bullish profile for Tuesday.”

    Note: Monday, February 17, is a US national holiday and all commodity/stock markets are closed.

    Sharon C Johnson, @Copyright 2014

    The views and opinions offered in this report are solely those of Sharon C Johnson, an introducing broker for KCG Futures. The information contained in this report is taken from sources she believes to be reliable but is not guaranteed as to accuracy or completeness and is sent to you for information purposes only. Reproduction in whole or in part or any part or any other use without permission is prohibited.

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