Ever since reclaiming the 82 cents level about a month ago, the market has gone nowhere, closing the last 20 sessions in a very tight range of just 242 points, between 82.24 and 84.66 cents.

The changes in the CFTC spec/hedge report tell us that spec buying has been acting in support of the market, while trade selling has capped prices near the 85 cents level. The latest CFTC report as of December 31st showed speculators at 3.6 million bales net long, which means that they have bought a total of 3.2 million bales net since the market rallied above the 82 cents level on December 11.

Meanwhile the trade has used this 82-85 cents window to add a significant amount of additional shorts. As of December 31st, the trade net short position had risen to 10.3 million bales, an increase of 3.4 million bales in just three weeks. We suspect that most of these trade shorts are connected to basis-long positions of US, Australian and Brazilian cotton, as well as unfixed on-call positions.

We believe that the trade will likely be a net buyer of current crop futures from here on out, as there is not much grower cotton left to be hedged, while the unwinding of existing basis-longs and mill fixations will require short futures to be bought back. New crop is another story, as growers and merchants will become active in hedging next year’s production as we approach the planting window.

Index Funds are the most active sellers at the moment, since they are in the midst of their annual rebalancing, which started on January 8 and lasts for a total of five sessions. According to private estimates the rebalancing requires the selling of around 12’000 March futures, which is a rather large amount in such a short time frame. It is therefore not surprising that March gave up 180 points over the last two sessions and we expect to see additional pressure over the remaining three days of rebalancing. 

It is possible for this Index Fund related selling to push the spot month below 82 cents, which would trigger sell stops set by speculators. This in turn could lead to additional pressure and knock the market a lot lower than anticipated, possibly into the 78-80 cents range. However, if this were to happen we would consider it to be an excellent opportunity for mills to fix their remaining on-call contracts and for merchants to unload some of their basis-long positions.

US export sales for the week that ended on January 2nd amounted to 76’300 running bales of Upland and Pima cotton, which brings total commitments for the current marketing year to around 7.7 million statistical bales, of which 3.3 million bales have so far been exported.

The pace of sales has cooled off considerably over the holiday period, but we don’t agree with some of the negative commentary in regards to these lower export numbers. Although higher prices may have discouraged some buyers, we see it as a positive that there were still 17 markets interested in US cotton. We further suspect that supply constraints played a role in slowing export sales, as the amount of offers is becoming more limited, both for quality as well as logistical reasons.

Statistically, the US situation presented itself as follows at the beginning of January. Total supply amounts to 17.0 million statistical bales (3.9 beginning stocks plus crop of 13.1 million bales), of which 1.4 million bales have yet to be harvested, ginned or classed. Against that we have current commitments of 11.3 million bales (7.7 export and 3.6 domestic use), which leaves 5.7 million bales for sale.

This may sound like a lot, but we need to consider that these supplies have to last until the next crop arrives in October. Ending stocks at the end of July will have to be at around 2.5 million bales in order to supply domestic mills and export markets with enough cotton between August and October.

This leaves only around 3.2 million bales of US cotton for sale between now and July, which means that weekly export sales would have to average just a little over 100’000 running bales over these remaining 30 weeks. Not a tall order, even if Chinese imports were to slow down!