Wednesday, June 1, 2016
Both large and small speculative accounts have been adding to their net-long positions the past week, despite relatively mixed views on the supply and demand picture. According to the most recent Commitment of Traders report, non-commercial and non-reportable traders added 4,695 new net-long positions during the reporting period ending May 24. This brings the overall net-long position of speculators to 46,600 contracts. Commercial traders have been net-sellers on the recent price rally, taking the other side of the speculative trade.
Cotton futures have joined the recent rally in many commodity prices, with the lead month July futures trading near the upper boundary of the recent trading range. However, a look at the current market fundamentals may put into question whether the rally is sustainable. When discussing the Cotton market, one must always look towards China, which is the largest producer and consumer of the fiber. Traders likely will be paying close attention to the Chinese government's auction of the nation's strategic Cotton reserves. So far it has been estimated that China has sold about 2 million bales from its reserves, but still controls nearly half of the global supplies. In addition, many analysts believe that China will curtail their Cotton imports this year, which could cause U.S. Cotton inventories to increase. The USDA is currently forecasting this coming season's ending stocks at approximately 4.7 million bales. However, this assumes that U.S. Cotton production and yields will fall below recent averages and U.S Cotton exports will surpass this past season's and move above 10 million bales. With Chinese imports expected to fall and many areas in the so called "Cotton Belt", including Texas, seeing good moisture levels early in the season, it is quite possible that the USDA may have to revise its U.S. production numbers upward as the season progresses and revise its U.S. export numbers lower, unless we see additional buying emerge from other major textile producing nations in Southeast Asia to overcome reduced Chinese buying.
Looking at the daily chart for July Cotton, we notice prices trading near 1-month highs, as the market has been in a general uptrend since recent lows were made back in late February. Prices are above both the 20- and 200-day moving averages, and the 14-day RSI is rather strong, with a current reading of 60.17. Trading volume has started to trend lower the past few weeks, and we will need to see prices successfully breakout above resistance at 64.74, preferably on above-average trading volume, in order to draw additional buying from trend-following trading systems, in order to add additional support to the recent uptrend. The May 13 low of 60.25 remains chart support for the July contract. Chart resistance remains at the aforementioned April 26 high of 64.75.
Mike Zarembski, Senior Commodity Analyst