The front month picked up 92 points this week while trading a range of 331 points that saw new high and settlement values set for the current bull move. This week’s settlement didn’t stray too far from our expectations; we had expected something near unchanged to slightly lower, but net export sales and shipments put forth in Thursday’s US cotton export report that exceeded the weekly requirements to meet the USDA’s revised 10.7M bale export projection forced prices a bit higher. Continued weakness in US currency likely also helped the front month move higher.
The USDA finally made the higher export projection that the market seemed to have been trading for some time official in Monday’s WASDE release by meeting trade expectations of raising 2013/14 exports 200K bales and lowering US ending stocks by the same amount. The remainder of the Mar balance sheet also resembled published pre-report trade expectations.
This week’s US export report, while significantly off W/W and M/M for both net new sales and shipments, kept pace with the USDA’s revised export projection. The report was more optimistic for new crop with an excess of 120K RBs of net sales reported against 2014/15 which brought the cumulative total for the MY beginning Aug 1, 2014 to over 1M statistical bales.
O-call sales were nearly unchanged against contract months remaining within the current MY, but increased by nearly 3.5% over all active contracts. Hence, the on-call sales data continues to be supportive of price, especially for the old crop.
Dec 14 picked up 52 points on the week to settle at 79.84 as it flirted with, then finally kissed the 80.00 mark today, trading approximately 100 lots there before retracing on the close. Sept 14 corn gained a penny on the week while Nov 14 soybeans gave back 13 cents on the week. We still believe that Dec 14 will need to do a little more in order to ensure plantings on prime, irrigated acreage, but given the current price of cottonseed and the level of rebates that some gins are offering, especially in the mid-south regions, cotton may hold its currently expected planting level so long as delivery month prices to not fall off significantly.
Looking forward, the pivotal report scheduled for release next week is expected to be the US export report, as it will provide a view on the level of demand rationing that has occurred at sustained price levels above 90.00. The volume weighted average price (VWAP) over the sales period to be reported up is approximately 91.80, which is over 300 points on the VWAP over the sales period reported upon this week. And, intraday low prices never dipped below 90.44.
Still, so long as net sales and shipments at least keep pace with the USDA’s revised export projection, the front month is not apt to retrace too far, as new business and on-call sales fixation opportunities are expected to reside within the 88.00 – 90.00 range.
Further, the final cotton ginning estimate is scheduled to be released from USDA-NASS on Tuesday, March 25 and the results, we think, are expected to be bullish. From regular analysis of weekly classing data, it appears that the final ginning number will be approximately 200K – 300K bales shy of the USDA’s 13.19M bale projection, and this would infer a US ending stocks figure closer to 2.5M bales. Ultimately, we think that this is unlikely to occur, but the inference of such would likely create the need to ration demand more ardently than has been accomplished thus far.
Our preliminary technical analysis favors a move higher on the week for the front month, and there is little surprise in this. The front month has amassed nearly 1500 points W/W over the last 16 weeks.
For the week, we will condition our directional bias on the weekly export report and an extrapolation of how the market may be looking ahead to the final ginning number. If net sales and shipments put forth at least keep pace with accomplishing the USDA’s 10.7M bale export projection (approximately 50K and 200K RBs, respectively) we expect the front month to finish near unchanged to higher next Friday. However, if net sales, and especially if net sales and shipments, are significantly below the aforementioned levels we will expect the front month to give up a bit on the week.
We expect volatility to be similar as was seen this week while trading a range of 90.50 – 93.75 on the inside or 89.00 – 95.00 on the outside.
We’ll also take a step further out on the limb and say that we expect Dec 14 to finally break through the glass ceiling at 80.00 during the coming week.
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Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com.