The front month picked up 112 points on the week, which was on par with our expectations given the results of the latest USDA cotton export report. Dec 14 also met our expectations by breaking through the 80.00 level, but failed to meet our expectations by not doing so with a bit more fanfare.
The current bull move is impressive, with the front month gaining just over 1600 points over the last 17 weeks and 617 over the past three weeks. The move has been fueled by both technical and fundamental factors thus far; most of these factors remain positive today.
Evidence of significant demand rationing for US cotton at sustained front month prices above the 90.00 level was not seen on this week’s US cotton export report. Total net sales were near 55K RBs while shipments were a robust 345K RBs for all cotton. Both net sales and shipment figures exceeded the per week requirements to meet the USDA’s revised 10.7M statistical bale export projection. Sales cancellations were a sparse 15K RBs.
Net sales of US cotton against the 2014/15 MY improved W/W at approximately 136K RBs with cumulative exports now at nearly 1.1M statistical bales, which is 10% of the USDA’s US export projection for MY beginning Aug 1, 2014.
Looking forward, net sales against the current MY that are near 50K RBs (so long as shipments remain above 200K RBs) are likely to be supportive, as such will infer a slight tightening of the US S&D. In order to see front month prices retrace significantly on the export report alone, net sales of or below zero may be required.
Speculative funds and holders of non-reportable positions were bullish for the week ending Mar 11 as they added approximately 8% and 21% to their futures only and futures and options combined net long positions. Examination of the data suggests that in aggregate, the aforementioned entities added significantly to their longs near the 90.00 level.
News items that were less than supportive were disseminated this week as well. While it was generally expected that the Fed would reduce stimulus bond purchases by another $10B this month, comments from Chairperson Yellen regarding a probable interest rate hike a half year after the current stimulus efforts have concluded prompted a near 1% increase in the US Dollar Index. This was not supportive of the commodity sector. Further, and specific to cotton, CNCRC reserve release auction prices have dipped recently, which applied further drag to cotton rallies.
Next week will be light with respect to cotton and economic reports, but the USDA final cotton ginning report is scheduled for release on Mar 25 and, given the current tightness of US stocks, the weekly export report on Thu will bear watching.
From the latest USDA-AMS classing data, it would appear that the final ginning number will most likely be closer to 12.9M than 13.0M bales, and we expect this to be bullish. Concerning the export report, the trade will be given an opportunity to see if significant demand rationing has occurred at sustained price levels above 90.56 and at a volume weighted average price (VWAP) of approximately 92.25 vs the VWAP from the previous sales period of 91.80.
Continued droughty conditions in West Texas and California will likely continue to add some weather premium to the new crop market, while continued strong exports against the coming MY will also likely be supportive. Help from Sept corn and Nov soybeans would also be positive; on the week Dec 14 gained about 1% while corn gave back nearly the same amount and soybeans finished near unchanged. The next area of major resistance now appears to be near 80.50.
For the front month, our preliminary technical analysis suggests another move higher, as does the expected result of the ginning report. We will again condition our directional bias on the US export report and suggest that if net sales are north of 50K RBs and shipments are near 250K RBs, or greater, the front month will likely finish near unchanged to higher, else we would expect May 14 to finish near unchanged to a bit lower. We expect May 14 to trade a range of 91.50 – 94.80 on the inside or 90.50 – 96.00 on the outside.
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