December gapped 31 points lower at the opening Monday evening, ultimately leaving 12 points of the gap uncovered as of today’s market close. Strong US currency values helped to hold prices at bay this week with US currency value surging post the European Central Bank’s decision to yet move benchmark interest rates lower. Coupled with declining US demand and uncertainty of upcoming policy announcements in China, Dec was able to to break well below nearby support at 65.00.
The drop-off in US export sales is only partially due to price factors. The world – particularly the northern hemisphere – will soon be flush with cotton. Mills are apparently anticipating such and appear to be purchasing for nearby needs only. Also, China has revealed little of how it will incentivize mills to purchase raw materials from the CNCRC reserve stockpile. While we expect world consumption projections and estimates to be generally enhanced as the MY wears on, mills would likely not clear the market of a projected 11+ month supply at any nearby futures level.
To be a bit more chipper, though, the US has sold in excess of 2M bales over the past 9 weeks and is about 49% committed against the USDA’s 10.7M bale export projection.
The USDA will release the Sept WASDE report, along with the weekly US cotton export report on Thu, Sept 11 at 12:00 PM and 8:30 AM EST, respectively. Volatility should pick up just a bit on that day.
Export sales are likely to be similar to this week’s tally or, perhaps a bit better over the holiday-shortened sales period; the volume weighted average price for the period is at an approximate 80 point discount to the period ending Aug 28.
Pre-WASDE estimates are mixed, especially with respect to the US crop. Informa Economics has the crop pegged at 17.8M bales while most other private estimates seem to range from 17.0M – 17.5M. Ours has been at just below 17.4M, but we will revisit this over the weekend. The mid-southern states are likely to see a reduction in the planted area estimate while generally lower yielding regions of TX could realize an increase. We still do not expect projected US ending stocks to increase substantially above the USDA’s current 5.6M bale projection.
With respect to the world S&D, there seems to almost be an unspoken consensus that the USDA’s projection of 2014/15 production will increase significantly. China has found more area in high-yielding Xinjiang while USDA attaché reports suggest more production from India (which infers Pakistan might also fare better, as well) and Turkey. Recent rains over Australia, coupled with significant cash price increases ahead of planting season in both Australia and Brazil, suggest that production could be projected higher within the southern hemisphere, as well. We expect the consumption projection to increase somewhat, too, but not at the same pace.
The aggregate non-commercial sector held a net short futures position for the week ending Sept 2 vs the previous week’s small net long position, but they are virtually flat when considering both futures and options. When accounting for likely spreading activity, managed money firms hold a significant net long position against the Dec contract; however, it also appears that they remain sellers of volatility. This implies, we think, that speculators believe the current market will remain range bound.
The weekly technical analysis is bearish (the weekly gap above our current market reinforces this notion) with money flow indicators continuing to register an oversold condition. Chart analysis of the Dec contact suggests that Dec could eventually fall to the mid-50s amid impending harvest pressure, although the continuation chart suggests that the 60.00 level could provide support should current contract lows give way. And, this market continues to be riddled with gaps; gaps remain below the current market at 63.84 – 63.88 and 63.37 – 63.46 and above the market at 66.45 – 66.57, 67.44 – 67.46 and 77.80 – 78.00. We would expect the gaps below the market will become filled prior to those above.
Fundamentally, it is all about new S&D information. Although our bias is for lower on the week, perhaps to even challenge the current contract low near 62.00, any tightening of the US balance sheet (so long as the world does not add grossly to its C/O outside of China) may allow the market to retest overhead resistance another time.
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