December cotton began the week with a 24 point gap on the opening bell, leaving one half of it uncovered en route to a 361 point loss on the week. We expected the market to go this way last week, although we’re not particularly thrilled that it did. The grains were losers on the week, November soybeans and December wheat particularly so.
Demand for US cotton for export continues to be tepid at best. Over the last 3 weeks the US has averaged a mere 35K RBs of net sales against the current MY. Strength in US currency has not helped US export sales, and while China’s currency has recently fared well against the US dollar, timing and huge reserve stocks will likely limit China’s interest in US cotton for the near-term.
China has not been a presence on the weekly report, with the exception of large sales cancellations last week. This is somewhat understandable as harvesting operations continue there and high-quality cotton from Xinjiang either is or is becoming ready for nearby delivery to mills. Announcements so far out of China indicate the government intends to subsidize producing entities in Xinjiang via a target pricing mechanism that will theoretically allow prices to “float” on the world value of cotton.
No official announcement has been made that import quotas will be allotted to mills in an effort to draw down the massive reserve stockpile. The vast majority of sales from the CNCRC reserve this year were from domestic stock, which follows that the overall quality of the reserve has improved a bit.
On the supply side, we still think that world production can climb higher. We also think that the USDA’s consumption projection can move higher as well, but likely at a slower pace. In the US, aside from the Desert Southwest, weather conditions are less than optimal for the cotton plant’s final maturity phase and have hindered applications of defoliants and boll openers in many areas.
Continued cool and wet weather, particularly in west Texas, may be supportive of Dec futures over the near-term. Still, crop insurance data to date indicates loss ratios of 35%, 32% and 44% for all cotton, upland cotton and Texas upland cotton, respectively. Texas, over an extended time horizon, has averaged a loss ratio for upland cotton of just over 100%. It would appear that a large U.S. crop still looms.
Looking forward – next week is light with respect to release of economic data. The price structure and strength of U.S. currency over the export sales period ending September 18 are less friendly than those associated with the period reported upon this week. We doubt that export sales will improve a great deal W/W.
Technically, the weekly picture is bearish once again, with no sign of the market being in an oversold condition. Fundamentally, the analysis, in our view, remains more bearish than bullish. For the week ending September 16, positions held by the aggregate non-commercial sector and managed money firms did not change a great deal, with managed money perhaps getting a bit longer Dec (these longs may have now been liquidated). Managed money firms appear to remain sellers of volatility, which reinforces the recent trading range.
The overall analysis leads us to believe that Dec retains further downside potential, perhaps to challenge the 62.00 level, or so, over the coming week.
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