The ICE Mar cotton contract picked up 25 points on the week, settling at 61.99 on heavy, spread-driven volume as scheduled index fund roll periods came to a close. Given the weakness in the grain and other outside markets this week and the strengthening value of US currency, we think that ICE cotton performed quite well, if not admirably.
The Nov WASDE report, for the most part, looked very much like the average of published analyst’s expectations – world production, consumption and ending stocks were notably lower (although one can hardly call the numbers bullish) while US ending stocks were unchanged vs Oct. The most bullish aspect of the report, in our thinking, was the 1.1M bale reduction to ending stocks outside of China.
Still, the market was fickle, Mar settled just below unchanged after trading up to 6300 just minutes post the report’s release. Perhaps it was collective disbelief regarding the USDA’s refusal to lower its US export projection from 10.2M bales. And, US export sales for the period ending Nov 11 were off around 40K running bales vs the previous week, but have averaged nearly 150K running bales over the last two weeks. The trade also seems to think that the USDA’s estimate of aggregate world demand is too high, and that may be true, but they also think that the production estimate is too high. Overall, I would venture to guess that the average trade estimate of world ending stocks for 2015/16 (overall and outside of China) is very close to the USDA’s estimate.
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As we wait for demand to improve (which it typically does at this time of year), the harvest is wrapping up in the Delta, and will soon be finished in the Desert Southwest. Cotton remains on the stalk in TX, OK and the southeastern states; weather will likely facilitate harvest operations in TX and OK next week, but southeastern producers will likely have to continue to dodge showers. We still look for US production to move toward 13M bales.
For next week the standard weekly technical analysis for money flow into the Mar contract are bearish, but the market is again in an oversold condition. The export report for the week ending Nov 12 is likely to be at least as decent as was the one put forth this week. Overall, the longer-term trading range of near 6000 – 6800 will probably hold over the near-term with volatility to the upside likely to be greater than that to the downside.
Spot basis for higher grades remains at a historically high level, with even leafy recaps drawing bids over Dec futures. That said, the consensus among buyers and merchants is that at some point between Thanksgiving and the New Year, the basis should begin to move towards more typical levels, resulting in a 3-5 cent loss to producers, relative to futures. Despite sounding like a broken record, our best advice to producers is to sell recaps on any “rally” towards or past 6300, and let someone else own your cotton by 2016. Bullish strategies might be most profitably focused on the Dec16 contract in hopes of a spring planting rally.
…And then there were six… That is, unbeaten teams left in the major college football ranks. Sadly, the University of Memphis is not among them after taking one on the chin to the now-ranked 25th Naval Academy. The Oklahoma State Cowboys will try to stay perfect at Iowa State, the team that cost them a trip to the national championship game a few years back, while the Red Wolves of Arkansas State and the state bellwether Hogs continue to play strongly during the second half of the season. At times, it truly is difficult to live in the heart of the vaunted Southeastern Conference with the strongest loyalties demanding that I cheer for the Big 12.
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