ICE futures for March delivery picked up 223 points this week (429 points over the past two weeks) to settle at 61.59. Volatility increased with a tremendous influx of volume; the weekly trading range spanned 310 points. The Mar – May spread approached flat, while Dec picked up 41 points, finishing at 63.20.
Although our models called for a greater likelihood for upward price movement this week, we called it near unchanged to lower. Mathematical and statistical models are devoid of emotion, and they often tell us things that we need to see but that we often do not care to believe.
However, they also don’t succumb to negative feelings such as frustration, despondence, despair, etc., which are among adjectives accurately characterizing many traders’ general attitude toward the cotton market for some time now.
On a positive note, demand for US cotton remains white hot – nearly 2.5M running bales, or nearly 26% of the USDA’s 10M bale export projection, have been sold over the last 7 weeks. The US is now nearly 100% committed against the USDA’s target, and shipments are now exceeding the pace required to meet the USDA’s export target. Sales are likely to again be reported at a robust level on next week’s report.
However these continued strong US export sales are likely anticipated by the market, in contrast to the National Cotton Council’s (NCC) 2015 acreage survey (to be released on Saturday, Feb 7) and the Feb WASDE release on Tue, Feb 10. We expect the NCC number to be just at or above 9M total acres, and we think it could rival the low value (since 1998) of 8.1M acres. We say this because of the extreme bearishness of the market and the general sentiment of discontent at the time the survey was being answered by producers.
This sentiment has changed little as the winter has worn on. From personal knowledge, we are aware of a group of smart and seasoned growers within the north delta who have returned over 20K acres to cotton gins and land companies that insisted cotton be raised on their land. With successful cotton producers foregoing their option to steward irrigated land that regularly produces 1250+ lbs per acre, we think that the results of this year’s survey are likely to reflect that sentiment.
Concerning next week’s WASDE report release, we expect world production and ending stocks to move southward just a bit, with aggregate world consumption projected near unchanged vs the Jan report. We expect US ending stocks to be off vs the Jan report, too, per a modest increase in the USDA’s export projection. If shipments and sales continue to dazzle through Feb, we would expect further upward revisions to be forthcoming.
The tightening of US old crop stocks will, no doubt, be friendly for new crop futures prices. However, upward action may not be as timely as producers would hope for. Although the commercial market sector will likely need to bid for mid-south and southeast new crop acreage, the speculative sector could opt to bull spread positions and sell Dec futures.
This obviously poses a problem for producers following the otherwise reasonable strategy of waiting for a pre-plant rally to contract and price new crop cotton. Producer pressure and spec spreads combined could cap a spring rally several cents lower than otherwise expected.
Protecting oneself against this roll pressure will require more work and risk assumption than a traditional hedge or marketing strategy. There are a variety of spread and straddle strategies available to producers, but an in depth discussion is beyond the scope of this week’s column. It is never a bad idea to have regular conversations with both your cotton broker and your futures broker. The next few weeks would be a great time to have these conversations.
Also, at the risk of sounding like a broken record, any rallies above the mid-upper 60s in Dec could be fleeting, so producers will be well served by having their relevant information ready to take advantage of contracting opportunities. Current new crop basis is in the same range as we saw a year ago, but this could potentially change in the coming weeks as merchants get more competitive for scarce acres.
The standard technical analysis remains mostly bearish, while our proprietary analyses are less bearish. Fundamentally, the market may be sprouting horns with respect to the US old crop.
For next week, we think that the market, in aggregate, expects US ending stocks to be projected within a range of 4.2M – 4.4M bales. The market will also not likely be shocked by NCC new crop planting intentions near 9M acres. With respect to the world balance sheet, it seems impossible that a bullish report could be in the offing, although a significant production debit to China could be somewhat supportive for ICE futures. For the waning Mar contract, it is likely immaterial.
At this stage it is likely that volatility will increase as a myriad of positions are either offset or rolled. However, old crop futures seem destined to continue to challenge resistance, if not move higher.
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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