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Ever since the market broke a 5-month uptrend line on August 17, it has been stuck in a very narrow range, unable to generate any momentum whatsoever. For the past thirteen sessions the market has closed no lower than 57.64 cents and no higher than 59.74 cents, a range of just 210 points!
Following the rules of technical analysis, speculators have changed their modus operandi after some key support levels were taken out and they are now selling into strength instead of buying dips. According to the latest ICE spec/hedge report, speculators sold over 1.0 million bales net in the futures market last week, by liquidating 3'028 contracts on the long side and by adding 7'403 new shorts. While speculators were the driving force behind the market's rally from 40 to 65 cents, they are now the ones setting up big road blocks.
The trade on the other hand is providing strong support at around 57/58 cents, as cash sales have once again greatly improved thanks to the recent break in prices. This morning's export sales report of 322'700 running bales of Upland and Pima cotton was above expectations and brings the two-week total to 566'400 running bales. Since a lot of these sales came out of basis-long positions, they prompted traders to buy futures back to complete the transaction. This, combined with some mill fixations that were done on recent dips, explains why the trade bought back 10'431 contracts last week.
After trending lower for several weeks, the AWP seems to be in a state of inertia as well, since next week's AWP of 46.06 cents is just 7 points lower than in the current period, while the daily calculation was at 46.03 cents this morning. Although the AWP/Dec futures spread has improved substantially this week, it is still about 2-3 cents shy of where it needs to be in order to free up new crop cotton from the loan.
What will it take to inject some new life into the market? With production and consumption looking fairly well balanced again this season, it will be difficult to generate new momentum. In its last report the USDA saw world output at 105.8 million bales and mill use at 110.3 million bales (112.8 million less 2.5 million "loss adjustment). Since then the prospects for production seem to have increased slightly, while the outlook for demand has probably been maintained. Therefore, the projected output gap may have narrowed a bit, which is not what the market needs if it wants to escape this lethargic state. There is still the possibility for something to go wrong at harvest, but if we talk about the same supply and demand numbers in a couple of months from now, we may be looking at a rather boring season in terms of market movement.
Since we are approaching the harvest period, let's take a closer look at how the general weather pattern is shaping up. Over the last couple of months, we have seen a transition from a "cold" La Nina to a "warm" El Nino episode, with experts predicting this to be amoderate to strong El Nino. The lack of tropical activity in the Atlantic is a clear indication for the presence of El Nino, because the strong upper level wind shear associated with El Nino suppresses the development of tropical systems. Also, the "on-off-on" Indian monsoon is typical in an El Nino phase.
Usually El Nino winters tend to be warmer than normal in the northern half of the US, while the southern half is typically colder and wetter than average. However, El Nino autumns are often found to be cool and in this regard there are two other developments that need to be watched.
The first one is low sunspot activity, which is often associated with cooler than normal global temperatures. We are currently in a trough in the 22-year sunspot cycle, but the 2007-2009 stretch has been unusually quiet in terms of days without sunspots and is second only to the 1911-1913 period. The second, more worrisome situation is the much colder than normal arctic air mass over Alaska and Northern Canada. Typically this air mass warms up during the summer, but due to increased volcanic activity there has been more dust and sulfur in the atmosphere than normal, blocking out sunlight and keeping this air mass on the cool side. The fear is that the jet stream could transport this cold air mass south and cause an early frost or freeze. Last week, when the calendar was still reading August, Minnesota experienced a rather unusual 'soft frost'.
In view of the above the market needs to be careful not to count the chickens before they hatch. Even though things look pretty good at the moment, there are still another six or seven weeks to go before we can consider this crop safe and for this reason the market still deserves a weather premium.
So where do we go from here? December has now been trading between 55 and 65 cents for nearly five months. Barring any problems on the weather front, it will be difficult to break out from this trading range. If the global balance sheet remains in equilibrium, then the 60 cents level looks like a logical pivot point. Above that level we will see an increase in supplies, while mills will be ready to buy and fix prices below 60 cents. |
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