May cotton futures on the ICE picked up 134 points this week on heavy, spread-driven volume to settle at 64.66. Traders in China began their week-long New Year’s celebration this week, but so far it has not had a detrimental effect on cotton futures prices.
The Dec contract gained 141 points over the holiday-shortened trading week to settle at 65.48. Suddenly, the 70.00 level for US new crop does not seem too far-fetched.
Weekly export sales were again disappointing. The shipment pace also continues to strengthen, despite labor issues at US west coast ports. Given the market’s mere 3 point loss vs Thursday’s settlement, the export figures were apparently just what the market had expected.
The most significant news this week came from the USDA’s annual Agricultural Outlook Forum. In its first attempt at projecting the coming marketing year’s supply and demand balance sheets, the USDA expects US production to contract to 14M bales on planted area of 9.7M acres. US new crop C/O is projected at 4.3M bales.
The world balance sheet is expected to tighten with production, consumption and C/O projected at 113M, 116M and 106.8M bales, respectively. Further, reserve stocks in China are expected to be drawn down to near 45M bales.
Despite the tightening of the balance sheet, the world projections are not at all bullish. The US balance sheet, however, could tighten considerably beyond the USDA projection as exports were only projected at 10.2M bales. Too, should Dec futures prices not breach the 70.00 level, the US may not be able to find 9.7M acres available for cotton cultivation.
Our own projections show that the US likely needs to commit 9.75M acres to cotton production, which reinforces the need for a pre-planting rally.
Looking forward, strong old crop export sales will help the case for US new crop prices. The recent projections from the USDA and the National Cotton Council have already proved to be beneficial to the US cotton producer.
Quality remains sought after. Australian spot prices remain above US 80 cents per lb. Hence, we expect that the merchant community needs more than 1.1M acres from the most reliable production and quality US region – the Midsouth. This should help to coax Dec futures higher as planting season approaches.
Although a pall of gloom hangs over the producer sector, there is a potential silver lining in the most recent numbers from the USDA. With a world surplus but tight domestic supply, we have seen historically high premiums for high quality cotton offered consistently from last fall through this week.
Given an essentially unchanged domestic carryout for 2015, it is not unreasonable to expect to see a similarly strong basis offered for high quality recaps in the fall of 2015 and into the winter of 2016.
But, we’re reluctant to advise producers to simply roll the dice in hopes of producing a high quality crop and being able to sell at a strong basis. That said, protecting prices with puts on spring rallies above 70 cents would put a floor under prices and leave producers able to take advantage of stronger basis in the fall.
For next week, export sales are again likely to be nothing special. The standard weekly technical analysis is neutral to somewhat bullish, but also overbought by several measures. On Friday, remarks from meetings at the annual Mid-south Cotton and Gin Show could affect futures prices, as well. I have not yet finished running our proprietary models just yet, and it is a bit too early in the evening to consult the Ouija Board, but old crop ICE futures are likely to be somewhat limited to the upside.
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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
