The Rupp Report: News From The Cotton Market

The past few weeks were weeks of great shocks on the financial front, which has an impact on the cotton market in general and for the traders in particular. Falling raw metal prices, problems on the U.S. stock market, and especially the now “not protected” Swiss Franc (See “The Rupp Report: You May Call It Faith,”, January 20, 2015) are reasons for the situation.
According to United Kingdom-based cotton trader Plexus Cotton Ltd., “With all these dislocations it is no wonder that many traders prefer a move to the sidelines, waiting for the fog to clear.”
Let’s take a look at the situation a few weeks ago.
Plexus Cotton stated in its January 15, 2015, Market Report that: “NY futures were on the defensive this week, as March fell 107 points to close at 59.49 cents. March traded to its lowest level since November 24 yesterday, getting to within 13 points of its 58.53 cents contract low, as negative vibes from outside markets overshadowed otherwise fairly constructive developments on the cotton front.
“Speculative selling into scale down trade buying seemed to once again be the main feature this week. This was already the case during the week of December 31 to January 6, according to the latest CFTC report, as speculators sold 8,137 contracts net, while index funds reduced their net long by 1,342 contracts. The trade was the lone buyer, acquiring 9,479 contracts.
“Overall speculators moved back to the short side with a 0.7 million bales net short as of January 6, while the trade carried a 4.1 million bales net short position of its own. Index funds had their lowest net long position in exactly three years at just 4.8 million bales, which is a bit surprising considering that there should have been some preemptive buying ahead of this week’s rebalancing. Maybe recent index fund redemptions more than offset any rebalancing efforts.”
Tenders Are Waiting
The mid-January Plexus Cotton Market Report noted that U.S. retail sales for December were reported at a negative 0.9 percent. The “USDA supply/demand report contained only minor changes that did not alter the ROW [rest-of-the-world] position by much,” stated Plexus Cotton. “The ROW production surplus is now at 13.43 million bales (vs. 13.38 million in December), while ROW ending stocks increased slightly to 45.48 million bales (vs. 45.42 million in Dec). The biggest change occurred in China, where mill use was lowered by 500,000 bales, contributing to a global drop in mill consumption of 365,000 bales last month. In its last two reports, the USDA has cut mill use by 1.6 million bales, which we feel is a bit too pessimistic.”
Upland And Pima
Plexus added that a bright spot mid-January was the U.S. export sales report, “which came in at an unexpectedly high 449,100 running bales of Upland and Pima cotton. China and Vietnam accounted for a combined 315,100 bales, and it was nice to see Turkey back with 54,000 bales. There were a total of 17 markets participating, which emphasizes the strength of this report.
“Shipments picked up their pace as well, with a marketing year high of 234,800 running bales leaving the country. Total commitments now amount to 8.4 million statistical bales (84% of the USDA export estimate), whereof 2.8 million bales have so far been shipped.”
In its report the following week — the January 22, 2015, Market Report — Plexus noted that NY futures came under additional pressure, “… as March dropped another 173 points to close at 57.76 cents. Speculative selling continued to weigh on the market, as March fell through the 58.50 cents support level, trading to levels last seen in September 2009.
Strong U.S. Dollar
Overall open interest jumped by more than 10,000 lots. According to Plexus, a reason for the jump is additional short selling “by speculators into scale down trade buying.”
“The cotton market continues to be dominated by negative vibes on the macro front, as deflation fears are spreading and the money crowd is scrambling for safe havens,” Plexus Cotton continued in the report dated January 22. “With the U.S. economy currently performing better than its counterparts across the two oceans, the U.S. has seen a large influx of capital, which has boosted the U.S. dollar and put a strong bid under the U.S. bond and stock markets.” According to Plexus Cotton, the announcement by the European Central Bank to print 60 billion Euros per month starting in March “has only exacerbated the move into the dollar.”
A U.S. Cotton Shortage (?)
Plexus stated that statistical position of the U.S. currently is a “supply at 18.5 million bales, whereof 12.2 million bales have so far been committed between the 8.4 million bales in export commitments and the 3.8 million bales that go to the domestic industry. This leaves theoretically 6.3 million bales for sale, of which around 5.8 million bales are Upland and 0.5 million are Pima. However, of the 5.8 million bales Upland we need to reserve at least 2.5 million bales to cover domestic and foreign mills between August and October, which brings availability between now and the end of the marketing year down to just around 3.3 million bales.
“That’s not a lot of cotton,” reported Plexus, “considering that most mills are still wide open for the second and third quarter. With Brazil and Australia producing a combined 2.9 million fewer bales than a year ago, supply for machine-picked cotton could therefore get quite tight this spring and summer. Furthermore, U.S. plantings are expected to drop by about 11-12% next season ….”
Continuing into the Plexus Cotton Market Report from January 29, 2015, NY futures regained ground, “as March soared 181 points to close at 59.57 cents. Continued strong demand for U.S. cotton has lifted the futures market to a two-week high, with March closing in on the 60 cents level. From a technical perspective, the market has maneuvered itself into an interesting position, with the 40- and 50-day moving averages looming less than half a cent above today’s close and with the weekly continuation chart about to break out of a downtrend channel dating back to last summer. Given the large outright spec short position it may therefore only be a matter of time until some major buy stops get triggered.”
The Global Situation
“… China holds around 58 percent of the massive global stockpile of 108.6 million bales, but the price plateau in China is some 35 cents higher than in the rest of the world,” explained Plexus Cotton. “Given this large price differential, China is not likely to offer any of its cotton to the ROW — quite to the contrary! China is expected to remain a net importer in the foreseeable future, though at a slower pace than in recent years.”
The final Market Report for January continued: “… the stock-to-use ratio of 60 percent is still well within its 5-year range of between 52.2 and 64.7 percent. Considering how tight stocks were at the end of the last two seasons, the extra 6.5 million bales in ROW inventory was a welcome addition that should theoretically prevent another price squeeze going into this spring and summer.
“Mills have shown a strong preference for machine-picked high grades this season, which is why the U.S. has been able to capture so much more business than its competitors. The fact that other machine-picked origins like Brazil and Australia are looking at much smaller crops has also contributed to the strong showing of U.S. exports.”
Upland And Pima Again
According to Plexus Cotton, “… U.S. export sales report topped all expectations with 571,900 running bales for Upland and Pima combined. China and Vietnam were once again the top buyers with a combined 352,500 running bales. Total commitments for the season have now risen to 9.4 million statistical bales, of which 3.4 million bales have so far been shipped.” Plexus is certain that “… the USDA will have to make an adjustment to its current export estimate of 10.0 million bales, possibly by as much as a million bales.
“By selling over 1.5 million bales over the last three weeks, the U.S. has tightened its statistical position to a point at which rationing via higher prices becomes likely. Export and domestic commitments already amount to around 13.2 million bales, which leaves only some 4.8 million bales of Upland and 0.5 million bales of Pima available until new crop arrives eight months from now. Of that, domestic mills will need at least 1.0 million bales between August and October to tie them over to new crop.”
Penalty For The Futures Market?
In closing, the January 29 Market Report, Plexus predicted “… the U.S. market could take on a life of its own and this in turn would have bullish implications for the NY futures market. According to the latest classing report, the amount of tenderable qualities reached 69.1 percent this season. Total supply of Upland cotton, including beginning stocks, amounts to roughly 18.0 million statistical bales, which would give us around 12.4 million bales of tenderable qualities.
“Considering that total commitments are already at 13.2 million statistical bales, it doesn’t take a lot of imagination to conclude that tenderable grades might soon be in short supply, if they aren’t already.
“Furthermore, with the AWP [average wholesale price] set at 44.99 cents for the coming week (vs. 45.59 cents this week), there is little incentive to redeem or ‘pop’ the six million bales that remain in the subsidy program, which only prolongs the existing tightness in the cash market.”

February 3, 2015