The front month gave up just four points on the week while Dec let go of 200 as rains that had begun at this time last week continued on through the holiday weekend.
The front month was supported by fixation of on-call sales (down 29% for the week ending May 23) and some new business being conducted even as certificated stocks remained near unchanged and fund liquidation of July longs commenced with the Rogers roll. Fund rolling activity will increase next week as the Rogers roll continues and the Goldman roll initiates.
This week’s commitments of traders data shows further significant reduction of net longs by the speculative sector while also showing a continuing trend of increased longs (futures only) for the trade. Many of the trades recent long additions could be foretelling of a taker of certificated stocks currently pledged to the board.
USDA-FAS reported total sales of 64K RBs and export shipments of 228K RBs against the current MY. Sales cancellations were a mere 1.4K RBs. Although net sales were off nearly 300K RBs W/W, the market expected a large decline per availability of stocks, current certificated stock levels and the nature of last week’s large sales into China.
Total US export commitments now stand at 102% of the USDA’s 10.4M bale export projection and negative net sales of approximately 21K RBs over the next 9 weeks would still allow the USDA’s target to be hit. Shipments will need to average about 130K RBs per week over the next 10 weeks in order to meet the target. Net sales and shipments of 12K RBs and 145K RBs per week, respectively, would meet the USDA’s former 10.7M bale export projection.
Total net sales of 116K RBs were reported against the 2014/15 MY; export sales against the coming MY are now at 21% of the USDA’s 9.7M bale target for next season.
Looking forward, daily volume weighted average prices and average intraday low prices over the sales reporting period to be addressed in Thursday’s US cotton export report are at approximate 370 and 420 point discounts, respectively, vs the assay period reported upon this week. Further, the average July – A-Index spread is wider by nearly 140 points.
Next week will be heavy with respect to domestic and international economic reports, but the focus for the cotton market, outside of the weekly export report, will likely be the June 11 WASDE report release.
The USDA is bound to employ March 31 prospective planting survey results as a base until the June 30 acreage report is released.
Applying a system of averages to abandonment and yield parameters that omits extreme values (both high and low); we would expect, at this time, the USDA to project US production for 2014 within a range of 15.0M – 15.25M bales. However, it is the 2014/15 projected ending stocks figure that will tell the tale. Currently, we can envision that they might change very little from the USDA’s current 3.9M bale projection, via reduced 2013/14 carryout.
Realistically, production could fall further on a continuation of recent droughty conditions in West Texas and by a likely reduction in total area planted to cotton. From May 1 – May 29 Nov soybean prices increased multiple times to intraday highs above $13.00/ bu while Dec cotton began a slide near May 1 that resulted in a low value (so far) of 77.00.
Acreage reductions of 250K acres, or more, could be realized. This is especially true over the southeastern states, which are currently facing an El Niño weather pattern that would likely make soybean production more profitable while also increasing threats to cotton harvest during the autumn months.
Adding to the likelihood of lowered acreage are reports from our merchant contacts indicating forward contracting is much lower than usual for the season. The combination of reduced contract obligations, higher soybean prices, and a shortened window for cotton planting due to late corn planting have all combined to move uncommitted acres away from cotton in late May.
On a weekly basis, the overall technical analysis for both July and Dec is bearish. However, the market remains near its 50% retracement level for the recent bull move (rolling front month). On a monthly basis, the front month has completed a key reversal pattern to the downside. Fundamentally, things may actually not be all that bleak for the near-term.
For the week we will call for near unchanged to higher for both contracts while expecting July to trade a range of 84.50 – 88.50 on the inside or 83.50 – 90.00 on the outside. For Dec, we will call the ranges at 77.00 – 79.00 on the inside or 75.50 – 80.75 on the outside.
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