Mar cotton futures on ICE gave up 205 points W/W and settled below expected strong support near 60. Nearly all of this week’s loss was realized over the last two trading days as cotton joined the major grains with significant losses on the week. Dec 15 futures gave up 147 points W/W, settling at 63.91. This week’s results were not on par with expectations that we put forth last week, but holiday weeks are notorious for defying reasonable expectations.
News this week was not generally bearish. Because of the holiday season, two US cotton export reports were released this week, with total combined sales and shipment figures of approximately 400K and 375K RBs, respectively. There is no problem with the pace of US export sales, but the pace of shipments continues to lag behind the pace required to meet the USDA’s export target, and such was likely a major reason for today’s sell off.
With respect to the mid-week loss on New Year’s Eve, much of it seemed to be technical, and likely encouraged by profit-taking by some long position holders. Some pointed to the flip W/W of the commercial sectors net long futures position to a net short as a reason for the sharp decline, but the change in position seemed to come about mostly from hedging, which should have mitigated losses somewhat.
The largest bearish factor – and not just for cotton – continues to be the surging value of US currency. The US Dollar Index finished the week 1.2% higher, settling above the 91.0 level for the first time in over in nearly 9 years. Not only does this make export sales of all US commodities more difficult to accomplish, but it tends to move speculative cash into less risky ventures. Cotton yarn and polyester prices in China continued to move lower this week amid data releases that suggest that China’s economy is slowing. Too, Indian auctions of reserve stocks are scheduled to commence on January 7. Still, these latter items are not fresh news.
Next week the market will be back to normal business hours and fully staffed trade offices. Historically, January is a month of cash inflow into the market, with the majority of the influx normally to the long side.
The weekly technical analysis continues to suggest lower price movement. However, the last time the front month made a fresh contract low, little fresh selling emerged. The market is trading well below price levels where considerable US export business has been accomplished. So, for next week, we will weigh the fundamental analysis a bit heavier than the technical analysis and call for a settlement W/W that is near unchanged to higher.
Looking a bit further out, our initial calculations suggest that the US will need to plant around 9.75M acres of cotton in 2015 to have an average shot at a C/O of 4M bales. Current Dec price levels will not procure such acreage; hence we continue to expect a significant pre-planting rally. But caution is warranted – once 2015 acreage is procured upward movement will likely depend on weather markets. Overall, supply is expected to challenge rallies over the foreseeable future.
Like many in the trade, we are fielding daily calls from growers struggling with planting decisions for the upcoming year. While we are sympathetic (we’re growers ourselves), it is worth noting that both cotton and grain markets can and frequently do make dramatic moves in the period between the first of the year and the first of the planting season. While we’re not holding our breath for Dec15 prices in the 80s, we see mid-high 70s in the next 90 days as a distinct possibility, which should translate to profitable process on better ground with controlled inputs.
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